Friday, April 15, 2005

IBM: Now What?

Like Japan retreating across the Pacific Ocean from its 1942 high-water mark—one island at a time—IBM has been selling or spinning off pieces of business as each became untenable for a high-cost, U.S.–based conglomerate.

The first to go was printers, sold off by Lou Gerstner on the cheap to a leveraged buyout group, which turned it around and resurrected it as publicly-traded Lexmark. IBM left quite a few billion on that particular table, although the positive impact on IBM’s P/E multiple from his “hardware-light” model compensated the Gerstner faithful.

Printers were followed, in no particular order, by hard drives, which IBM had pioneered, and the Wintel PC business, which IBM had invented.

IBM continued its transformation from low margin hardware to high margin software and services by acquiring a lot of software cats and dogs (including Informix—remember that one?) plus—for $3.5 billion—the Price Waterhouse consulting business.

Meanwhile, IBM tried to sign every IT outsourcing deal it could, and successfully convinced analysts to focus on IT services bookings as opposed to things like revenue growth, which have never met stated goals in the last five years.

Unfortunately, Jamie Dimon recently decided JP Morgan could handle its in-house IT better and less expensively than IBM, casting a shadow on the face of the new IBM which the Wall Street cheerleaders chose to ignore, until last night.

Last night came IBM’s doubly surprising earnings report—it was four days earlier than expected, and it was lousy. The data reveal starkly the shallowness of the IBM makeover. Earnings, excluding the change to option-expensing, for which I applauded IBM here a few postings ago, were 10% light. And services bookings were down 10% year over year.

I take back the good things I said about IBM for leading the switch to option expensing: the company is back to its old beat-the-number-by-a-penny shell games (which, under Gerstner, included using pension surpluses and the sale of real estate and intellectual property to make numbers), hinting to analysts of impending layoffs and a charge next quarter that will enable the company to, well, beat-the-number-by-a-penny in subsequent quarters.

So, for the “new” software-oriented, services-oriented IBM, the question is “now what?”

Don’t look for answers on the Street. The most un-helpful advice out of a whole batch came today from Goldman Sachs, whose tech research team appears to be trying to out-do its oil research team’s top-ticking “$100 a barrel oil” call of last week (you can look up the exact date of the bullish Goldman call on a chart of crude, and just find the day crude spiked up to its peak—from which it is down more than 10% today). Goldman is telling investors there is no need to buy IBM today, but no need to sell, either.

Thanks, guys!

Jeff Matthews
I Am Not Making This Up

1 comment:

MD said...

I have a GS report from 1998 which shows Conigliaro forecasting a $7.75 earnings per share for 1999. The stock was trading at around $140.

Seven years later and Goldman still has an outperform recommendation, but Conigliaro has just lowered her 2007 eps estimate to $6.00/share. The stock is currently trading at $77.

Makes one wonder what was the point of all those share buybacks. Dividends were maybe $5.00 in total over that period, but at least you got to hold onto that money.

At some point, we have to wake up and wonder about our preference for capital appreciation vs dividend payments (especially from mature businesses). Never mind that dividend payments have made up the lion's share of the market's historical return.

We have transferred huge amounts of wealth to senior management while getting lower share prices and paltry dividend payments in return.