When Buffett bought IBM, he justified the decision based on a specific financial target – to hit EPS of $20 a share by 2015. As Buffett said, “They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they’ve laid out another road map for 2015.”
I estimated that he bought IBM shares at $185 apiece in 2011 — they’ve since lost 25% of their value. And in the ensuing years, he’s acquired more shares at lower prices. So his cost basis is below $185. Forbes estimated that IBM shares trade 15% below Berkshire Hathaway’s cost basis in them.
Here are five reasons Buffett should take his losses on IBM. ...
2. IBM’s products lack universal appeal I will concede that organizations do buy computer hardware, software, and consulting services and IBM is in all those markets. But the IBM brand does not have the power that Coke has created and maintained for all these years.
3. Customers lack an addictive need to buy IBM’s products IBM was a leader in the IT industry. But is it still? If customers had an addictive need to buy IBM’s products, I would expect it to be a market leader in all its product lines. ... Sadly, it is not the leader in...
4. IBM has no moat IBM used to have the best business sales force in the computer industry. It used to be said that nobody got fired for buying from IBM. But IBM faces serious competition in every market in which it participates — except perhaps for mainframe computers. ...
Selected reader comments follow:
Buffett and the BOD should nominate a new leader and executive team that can use IBM assets to confirm its leadership in the one area it dominates (analytics) and orient the company to become an enabler for the many businesses that need to mount a defense against the onslaught from Amazon and the champions of the sharing economy like AirBnb and Uber. IBM will then advise and help the Sears and Macy’s of the world on how to adjust to a world that’s moving to online shopping, Hertz and Hilton on how to adjust to the sharing economy and old energy behemoths on how to work with distributed energy, micro grids and renewables.
Buffet can no longer ignore technology since technology companies are disrupting every business, and every business including his beloved insurance business will be disrupted and transformed. IBM can go back to its roots and help the world solve very complex problems, the world has so many like climate change, exploding healthcare costs
Most of them--like myself--have a hard time listening to Lou Gerstner when he speaks. Lou Gerstner used his 2002 book, Who Says Elephants Can't Dance? to claim not only strategic and financial success but cultural. He deserves credit for the first two but not the later. Our business schools should teach all its students to read any business book--but especially self-evaluations by Chief Executive Officers--with a healthy dose of skepticism. This is my perspective. It is a different perspective that business schools should consider when studying Lou's leadership of IBM. ...
In 1999, after achieving financial stability and with a U.S. pension plan that was overfunded by $7 billion, IBM’s senior vice president of human resources sent an e-mail to all U.S. employees advising them that effective July 1 IBM was converting its U.S. defined-benefit pension plan to a cash-balance plan.
The implications of this change were not readily apparent. Pension plans are complex financial instruments, and it takes an actuarial genius to interpret the impact of most changes to them. But it did not take long for a small group of vocal IBMers to understand how much they stood to lose: most understood they would need to work years longer to reach retirement; many realized they would never be able to retire, or would have to retire with a reduced standard of living; some grasped the concept of a “wear away” period (an industry term describing the time it takes just to “break even” after a conversion); most failed to notice that they had lost their retirement health care. But all employee-owners realized that the change impacted them in some way, that they had no choice and that their company had become just another corporation like the rest.
The pension plan changes of the nineties affected 140,000 U.S. employees, almost half (45.5%) of the worldwide, full-time IBM population. With the setting up of a new Yahoo! website to disseminate information, instead of 5,000 Gerstner Guerrillas there were now tens of thousands of IBMers using guerrilla warfare to fight an internal corporate change — a first in IBM’s eighty-five-year history. These employee-owners wrote, called and petitioned their government representatives. Within a few months the brightest of spotlights was placed on cash-balance conversions, a topic barely discussed in the news media before. Congressional hearings were scheduled, detailed reports were requested, and the IRS got involved (placing a moratorium on conversions).
Less than three months after his decision, Gerstner finally buckled under the pressure. But he only buckled halfway. A simple amendment offered a choice between the two plans, but only to individuals forty years of age or older with more than ten years of service. Even with this change, more than half (53.5%) of the U.S. employees still had their future retirement plans forcibly altered — 78,000 IBMers live today with drastically altered pensions and no or reduced retirement medical plans. Some were friends of mine who at the time were thirty-nine years old with nineteen years of service. ...
But it was not a great furor among a small group of IBM employees — rather, it was a great furor among a very large group of IBM employees. Although it arrived too late, U.S. Senator Bernie Sanders (Vermont) documented the effects of a cash-balance conversion. He requested a study using the congressional retirement plan as a benchmark.
The study documented losses ranging from 30% to 75% if a similar plan had been forced on Congress. Marie Cocco of Newsday wrote, “Sanders’ own benefit would be cut by 72 percent under a cash-balance formula.” From this congressional report, it is easy to visualize the impact of the 1999 pension changes, and to understand why so many employee-owners were so angry at a policy change that was unnecessary for the competitive or financial health of the company. ...
It was--and still is--IBM's game plan, based on the distributive injustice of me-first and -only, that drives its shareholder-first and -only strategy. And it was--and still is--this CEO- and board-driven, first-and-only strategy that subjugates all other IBM initiatives.
Selected reader comments follow:
The pension changes in the U.S. were a symptom of a new generation of U.S. leadership that put more emphasis on me-first and -only rather than service to man in all our various aspects of life: consumer man, employee man, investor man, and man as a member of society.
I do disagree with your "pension plan was for U.S. only." I document very clearly in my book the pension changes in the U.K. that caused employees to burn their Quarter Century Club Certificates in front of IBM labs there. I also have friends in Canada and Germany that sigh and have said "it is similar here" but have not documented those changes. The U.K. decisions is still being contested in the courts with initial wins going to the retirees at this point.
Anyone that has information on pension changes as they occurred (outside the U.S. and U.K.) and how it affected you can reach me through my web site. We can talk over Skype and all conversations are confidential. It just gives me more background information to ensure I keep writing from a more "international" perspective. I did not include the U.K. discussion here to keep the article to a decent length.
Met Gerstner at my first 100% Club. Most arrogant guy in the universe. I will spare you what he actually said.
His biggest problem was he never understood technology. Had a short temper. His way or the highway. And his biggest flaw; he always hid behind "shareholder value" yet left IBM with $400M. The worst CEO's hide behind shareholder value when that is so short sighted. CEO's and companies have an ecosystem to keep healthy that is much more than just shareholders. It has employees, suppliers, stake holders, customers etc etc etc.
What should have happened was the employees that were lied to should have risen up like this regional supermarket chain did in the Northeast. Market Basket. Absolutely fascinating story for you to dig into where the entire chain went on strike for months to oust greedy company CEO and bring back their beloved Artie T Demoulas, i.e. Watson senior. Had that happened, the great IBM Pension robbery would have been over in weeks or months. IBM should/could have simply stated all new hires would be on the new plan. They did not, and exploited legal loopholes. Then more loopholes with financial engineering and buybacks etc. Oh well.
As great a strategic thinker - as most think he was - this was a complete failure on his part to understand human nature. I think this played on his weakness: an inability to see things the way the folks in the trenches did.
This was a strength of both Watsons. They understood what motivated a person and "if" they had seen a necessity to change the IBM Pension Plan, they would have communicated it well, ensured it had the same impact for all (employee - executive alike), and they would have provided a choice to those that would have been impacted.
On the pension: Even those of us that didn't lose as much because we were second choicers were left feeling guilty because the only reason we got what we did was our age. On our team, some were older and kept the older plan with healthcare, some were younger and wanted to get rid of the pension plan as it did have a lot of holes - such as being back-end loaded. I did sweat out those last twelve years to make it to a qualified retirement. Too many very good friends did not make it. That is why I wrote my book - to get the pain of those days across and compare it with the IBM of the past.
I wrote another LinkedIn article entitled, "The Dancing Elephant is Crying this Week" to communicate that pain. It has been read by over 65,000 people with almost 300 comments - I think they get it.
On leadership: I absolutely agree. The way I put it in my articles is that IBM's 20th Century turn-around leadership has been replace with 21st Century jettison-now management.
On talent: I still know some great people that are there. More leave or are jettisoned every day. Good talent arrives daily, but the environment isn't conducive to staying around - many are there to get there time-in-service and move on. The environment is definitely not conducive to 120% performance efforts when the chips are down. The next economic downturn won't have the IBM Culture there to buffer it.
I agree he left a horrible legacy. I write to get that across. Hopefully more business schools will get this across. I do try and balance my perspective and remember how I felt "at the time" and when he joined. As I said, "I believed his words." Unfortunately, his words were not to be believed.
This is a humble opinion and what I see when I see or hear Lou Gerstner speak - my Rorschach test.
Thanks again for the comment. You are not alone in your expressions. Many use the "reply privately" function on LinkedIn to let me know what they think. I can say what I want to as a retiree - some can't - yet.
The company is well on its way to hiring more than 1,000 professional designers, and much of its management work force is being trained in design thinking. “I’ve never seen any company implement it on the scale of IBM,” said William Burnett, executive director of the design program at Stanford University. “To try to change a culture in a company that size is a daunting task.” ...
Virginia M. Rometty, IBM’s chief executive, has warned that this will be a difficult transition year. It will take time, she says, before its new businesses are large enough to become engines of growth for the whole company. The strategy, she insists, is the right one. What remains is to move ahead faster. “People ask, ‘Is there a silver bullet?’” Ms. Rometty said in a recent interview. “The silver bullet, you might say, is speed, this idea of speed.” ...
As software becomes more an online service, analysts say, the big corporate contracts that have sustained IBM’s software business will become less frequent. “For IBM, the dollars are going to have to come from sharply expanding its customer base so that developers at all kinds of companies, including start-ups, see IBM as a place to go to build new things,” said Frank Gens, chief analyst of the market research firm IDC. “That’s not been IBM’s reputation, and that’s the challenge Bluemix faces.” ...
The company’s predicament today has echoes of the past. IBM is gaining ground now, but it was late to the cloud business, behind Amazon, Google, Microsoft and Salesforce. The company’s financial performance is deteriorating, but it is still a corporation that generated nearly $16 billion in net profit from continuing operations last year. Its old-line businesses are in retreat, but with Watson it seems to be at the forefront of applying data-driven artificial intelligence to mainstream industries. ...
The pace and trajectory of the business are the big questions about IBM today. IBM’s stock price has declined 16 percent in the last year. Ms. Rometty is under pressure — and that pressure will not ease until its new businesses overshadow its legacy products. “The theory is that the new lines of business grow faster than the old ones decline, but we’ve not seen it yet,” said A. M. Sacconaghi, an analyst at Sanford C. Bernstein & Company.
Dr. Amdahl rose from South Dakota farm country, where he attended a one-room school without electricity, to become the epitome of a generation of computer pioneers who combined intellectual brilliance, managerial skill and entrepreneurial vigor to fuel the early growth of the industry.
As a young computer scientist at International Business Machines Corporation in the early 1960s, he played a crucial role in the development of the System/360 series, the most successful line of mainframe computers in IBM’s history. Its architecture influenced computer design for years to come.
This year's event, however, may well be the most consequential in several years, as it marks the return of OS/2.
Arca Noae, an organization run by veterans of the OS/2 ecosystem, obtained a license from IBM to sell a new distribution of that OS, which at present is codenamed Blue Lion.
I think most investors looking at IBM would be content with 10% annual returns over the next five years and the expectation of that level of return seems very reasonable to me. Valuing IBM is complicated, but in general, the bull approach to valuing the stock using a straight PE seems closer to the mark than the bear method including financial debt and pension liability grounded in unrealistic assumptions in the company's enterprise value.
Selected reader comments follow:
Not to talk about these leads one to fundamentally misunderstand why its share price continues to be increasingly discounted.
Here IBM's big problem.
At the end of 2013 Global Technology Services was a $38.5 Billion per year business. Per the 3Q14 announcement pre-tax Income is dropping at an 11% rate. Global Business serves was an $18.4 Billion business and is dropping at a rate of 15%. These two business units account for 57% of IBM's revenue. Bottom line 57% of IBM's business is now declining at double digit percentage rates. IBM's cloud is now a $3.1 Billion a year business. How long does it take to grow the cloud business to the approximate size of GTS? ($31B, or 10x growth)
Just as Sam Palmisano came up with a 10 year business plan to get the company to $20 EPS, isn't IBM doing about the same thing with Cloud? To grow Cloud to become a major business in IBM it will take at least 10 years of spectacular and sustained growth. How many firms in history have been able to sustain a 25% per year growth and over 10 years?
IBM could now be killing GTS at a rate FASTER than it can grow the new businesses.
Can IBM grow the new businesses at a strong rate with a damaged GTS? Will IBM's gutting of GTS put its other business plans at risk?
A Microsoft VP once told me 'if it doesn't increase market share or revenue, Microsoft isn't interested in it.' If the intent of IBM is to grow several new, major lines of business how does dumping over $100B in stock buybacks help increase market share or revenue?
No one is saying IBM has a poor business vision. The emphasis of Cloud, Analytics, Mobile, and Securely are all squarely aligned with the future needs of IBM's customers. The important question that continues to go unanswered is this: "Is the destruction of IBM's biggest business necessary for its future growth? Or is it putting IBM's future at risk?"
IBM's new round of stock repurchases, furloughs, and more layoffs shows the dominant priority of the company is short term shareholder value. The future business is a very distant second priority and the existing businesses are not a priority. This is NOT going to end well.
Finally IBM is in a variety of businesses with fundamentally different valuations. I don't know why folks don't, at a minimum, deconstruct the revenue streams, project them and reconstitute valuations based upon the piece parts and comps for the companies represented by the piece parts.
Cultural differences and time differences, not to mention the fact that IBM's Indian workforce is less educated than its U.S. workforce (less than 50 percent of IBM's Indian analysts have undergraduate degrees -- did you know that?) result in big efficiency declines. Yes, four Indians are still cheaper than one American but IT TAKES FOUR INDIANS to do the job. So the results compared to the projections that led to them are always a disappointment because one doesn't equal one, FOUR equals one. This is just one example of how the capital allocation theory fails.
Another example is IBM's sale last year of its Intel server business to Lenovo. The allocation of capital theory says Intel servers were a low-margin business so IBM sold it to recover capital while they still could and reallocate it to other -- higher-margin -- purposes. Go back and read the press releases at the time because they are telling. What higher-margin business did IBM cite as their new server priority? Remember IBM can't just bail out of the server business because that would leave a huge hole in their product line.
IBM SAID it would be investing more in their own Power8 chips and servers, which do have dramatically higher margins EXCEPT CUSTOMERS AREN'T BUYING THEM. Customers aren't stupid so they are sticking to Intel servers because of their dramatically higher performance efficiency. By dropping its Intel server business IBM WALKED AWAY FROM THE MARKET.
Ironically, IBM could have followed Apple's example and kept the division but not its factories. They could have gone to contract manufacturing, dispose of factories, keep the business, make it more competitive AND INCREASE MARGINS. Why didn't they do that? IBM didn't do that because they valued more the $2.3 billion in cash coming from Lenovo that (in IBM management's view) "saved" the earnings report for one quarter. That's not allocation of capital, it's short-term market placation at the expense of longer-term results.
Look at IBM's cloud growth in that same quarter when they sold the Intel server operation. They included in their definition of "cloud" the sales of Intel servers used to make the cloud AND THE SALE OF THE DIVISION THAT GENERATED THE REVENUE. No other cloud company does that. It made IBM's cloud business look better by including revenue that it is not only hard to argue is even cloud-related, it was accompanied by statements claiming this revenue growth was part of a longer-term trend. How can you have a trend that's based on a one-time event (the sale to Lenovo)? You can't.
Allocation of capital is a great excuse, but it's not IBM's true motivation, which is just making it through another dismal quarter.
I also agree with your comment that, although "four Indians are still cheaper than one American, but IT TAKES FOUR INDIANS to do the job." This seems to be a problem with IT management in almost all USA companies, that they don't understand this. There is a herd mentality in corporate management these days, and companies are trying to do what everyone else is doing, whether it makes sense or not.
With regard to the IBM X-Series servers (Intel servers) sold to Lenovo, IBM has always had problems being cost competitive. IBM has for a long time outsourced the actual manufacture of all the circuit boards and components to contract manufacturers, and only final assembly of systems is done by IBM employees. But that is what everyone else does also, and IBM has a bloated management and sales infrastructure, so they could not compete.
In an attempt to continually find even lower cost of manufacture, they used less reliable contract manufacturers, and eventually quality suffered. By the time IBM sold their X-Series servers to Lenovo, they were losing significant business because many servers were arriving at customers DOA. I know of one very solid Blue shop that switched from IBM X-Series to Cisco Intel servers because of hardware failure problems on X-Series servers, and I am sure there were others.
It's sort of like the restaurant business. Often, when a restaurant starts having financial problems, they cut costs in order to cut prices to attract new customers. But that usually ends up affecting the quality of the product, and then it is just a short amount of time before the restaurant closes.
The focus at IBM is not so much in getting Watson involved in making better weather forecasts, but in putting the world’s most famous supercomputer to work in mining epic amounts of data in order to help businesses come up with actionable insights about the weather on both a real-time and long-term basis.
Amazon joins the innovators list for the first time for innovations in data centers, devices, electronic methods and systems, according to its latest report.
The Thomson Reuters Top 100 global innovators program identifies innovators annually through an in-depth analysis based on a series of patent-related metrics that analyze what it means to be truly innovative.
There are 27 companies that are dropped from the list this year, including AT&T, IBM, Siemens and Xerox.
"For IBM, although they regularly top the list of U.S. patentees by volume of patents each year, the Top 100 Global Innovators listing evaluates not just volume, but also success, globalization and impact," said Bob Stembridge, analyst with Thomson Reuters IP & Science.
Big Blue used to lead American innovation, but not anymore. Instead, it now epitomizes everything wrong with the greedy short-term thinking that plagues c-suite ideology.
Let's first make it clear that we have NO problem with companies buying back their stock. In fact, we think it's a great way to reward shareholders. In many regards, it actually makes more sense than returning capital through dividends.
But we do take issue with companies misallocating their capital to manipulate their earnings. Company officers intentionally skew earnings ratios to boost their own bonuses. This generally comes at the expense of a company's long-term future.
This is particularly troubling when it happens at an American stalwart such as IBM. Especially when their business model faces more external threats than ever before. ...
So what's wrong with IBM?
Other companies have spent the last decade investing heavily into R&D, innovating new technologies and rapidly expanding their market share. IBM on the other hand has been stuck on a path set by former CEO Samuel J. Palmisano over a decade ago. And that is to financially engineer results at the expense of long-term growth. ...
The company has been juicing its financial ratios by borrowing billions of dollars to buy back its shares. All just to make the company appear to be a better value so that IBM leadership can claim success. And this continues to occur as the company's true underlying fundamentals rot. ...
IBM spent $5.4 billion on R&D last year. This is the LOWEST amount it has spent on R&D in over 12 years. And that is in absolute terms. R&D as a percentage of revenue has been even more dismal, at only 5% of sales.
Yet Microsoft spent over 12% of its revenue on R&D just last year. And they have been increasing this amount nearly every year over the last decade. This substantial investment has paid off for them. The software maker has been experiencing consistent increases in growth in most of its fiscal quarters. ...
IBM's focus on improving meaningless valuation ratios has led to their massive capital misallocation. As a result, IBM has either missed or underinvested in EVERY single major technology trend over the last 15 years. Just think of the three biggest technological disruptions in the last decade and a half. ...
IBM has only itself to blame. Its focus on short-term and superficial earnings ratios will come at a great cost in the future. Throw in other major equity headwinds (rising dollar, slowing China, turning business cycle, and possibly rising rates) and you have a short opportunity handed to you on a silver platter. But hey, at least IBM CEO Ginni Rometty got that eight-figure bonus last year for improving the company's EPS.
But the program has been failing many American employers who cannot get visas for foreigners with the special skills they need.
Instead, the outsourcing firms are increasingly dominating the program, federal records show. In recent years, they have obtained many thousands of the visas — which are limited to 85,000 a year — by learning to game the H-1B system without breaking the rules, researchers and lawyers said. ...
“The H-1B program is critical as a way for employers to fill skill gaps and for really talented people to come to the United States,” said Ronil Hira, a professor at Howard University who studies visa programs. “But the outsourcing companies are squeezing out legitimate users of the program,” he said. “The H-1Bs are actually pushing jobs offshore.”
Those firms have used the visas to bring their employees, mostly from India, for large contracts to take over work at American businesses. And as the share of H-1B visas obtained by outsourcing firms has grown, more Americans say they are being put out of work, or are seeing their jobs moved overseas. ...
The top companies receiving H-1B visas in recent years, Professor Hira found, include Tata Consultancy Services, known as TCS, Infosys and Wipro, all outsourcing giants based in India; Cognizant, with headquarters in New Jersey; and Accenture, a global operation incorporated in Ireland. ...
For example, federal law requires global companies employing large numbers of H-1B workers to sign a declaration saying they will not displace Americans. But there is a loophole: An exemption cancels that requirement if employers pay H-1B workers at least $60,000 a year — significantly less than an experienced technology worker’s salary in many parts of the country.
Many of the outsourcing firms’ temporary workers earn $60,000 or just a little more, according to federal data compiled by Professor Hira. ...
American titans like IBM, Microsoft, Facebook and Google also use H-1B visas and have pressed Congress to increase the annual quota.
Pros: The only upside is the flexibility to "work from home".
Cons: Although the so-called "work from home" flexibility, this organisation crawls it back effectively by dishing out the worst pay increment/ performance bonus year-on-year based on my experience with them for the past 4 years given the fact that my performance rating is consistently on a "Above-Average Contributor" (2+), whereby a 1 rating is considered top performer. So is this really considered an employee benefit or simply paying out of pocket for this flexibility?
In addition, I am expected to clock in minimum of 40 hours training per calendar year with ZERO training budget. This is the biggest joke thus far that I come across. And what counts into the training hours? Team meetings, internal so-called "cross trainings"...which are not creating a positive impact to my career growth in any way. This is on top of the ever-demanding work environment that I am placed into, while working with team members from across the other regions.
Advice to Management: Continue chasing after the pipeline numbers...and in return you're chasing away your staff.
Pros: Fairly good pay, good medical benefits, opportunity to work with some really great people and good training opportunities.
Cons: The new IBM management seems to think the best way to increase price per share is to reduce workforce or offshore work as opposed to doing better, more honest business. Raises are basically non-existent; I personally haven't even had a cost of living raise in over 10 years even though my ratings and revenue generated have always been high. At one time, working for IBM was very prestigious, but now many of the younger generation don't even know who IBM is. Very sad for a company that once was viewed as a world leader in the IT business.
Advice to Management: Thin out the middle management, appreciate your employees more and be more honest.
http://www.endicottalliance.org/thedisintegrationofemploymentinIBM.htm To all Alliance supporters, send and share the above link to the article "The disintegration of employment in IBM" far and wide. Put it on your FaceBook page; send it to newspapers; send it with comments to your political reps and send it to your co-workers. Help break the secrecy of IBM job cuts. Put some pressure on IBM. -Alliance-
Fear and intimidation has replaced trust and appreciation. The appraisal system was clearly rigged; promotions often a joke. Another kick in the teeth is the luxury airline IBM maintains for the executives. I once had a neighbor who worked there; no expense was spared from what I could gather.
Certainly, the long-term cost is being reflected in the stock price. Leaving IBM behind has been a tremendous relief for many, myself and family included. Of course, large companies rely on employee turnover to erase broken promises and mitigate management problems, but I suspect that elephant is very tired now. -Anonymous-
The Alliance has done a fantastic job but IBM employees remind me of bisons herded over the cliff to be swallowed up. IBM has 'invested' nearly as much in buybacks as its current market cap; just leaving money in the bank would have been better for shareholders. A 2013 summary from Druckenmiller was spot on, and the music plays in! News Articles Archives -Anonymous-
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