BusinessWeek on IBM

IBM is featured on the cover of this week’s BusinessWeek. Here’s Nick Summers’ feature, The Trouble With IBM. It’s harsh but not undeserved.

That was the IBM Rometty inherited in October 2011, when Palmisano named her the company’s first female CEO. It seemed like a golden moment. IBM was celebrating its centennial with record sales, record profits, and a record share price. An artificial-intelligence project called Watson hit the publicity jackpot by beating human champions on Jeopardy! And in November, IBM received the ultimate financial benediction: Warren Buffett revealed he had broken his rule of not investing in technology stocks with the purchase of a 5.5 percent stake in IBM for more than $10 billion. Buffett liked how entrenched the company had become in the world’s IT departments; he said Big Blue was like an auditor or a law firm—really difficult to break up with. He especially liked the road map Palmisano had pledged before stepping down. “They have this terrific reverence for the shareholder, which I think is very, very important,” Buffett said on CNBC.

The honeymoon proved short-lived. Rometty is by many accounts a smart, vigorous CEO—who turned out to have inherited a far more dire position than she, or much of Wall Street, may have realized. The megatrend is corporate America’s move to the cloud. It’s not just Amazon that IBM needs to worry about: In an August 2013 study of 15 cloud infrastructure providers, research firm Gartner (IT) rated IBM worst, behind Microsoft (MSFT), Rackspace (RAX), and Verizon (VZ).

Hardware sales have plummeted 24 percent in two years, turning a manageable decline into a full-on implosion. As a rule, new companies are not buying their own servers and mainframes, and larger corporations, instead of ordering new machines when they reach an upgrade point, are moving their workloads to the cloud, too. Rometty, keeping with Gerstner and Palmisano’s practice of selling businesses with shrinking profit margins, agreed in January to sell IBM’s low-end server business to Lenovo for $2.3 billion. (The deal awaits U.S. government approval.) IBM will attempt to resurrect its hardware sales with a new line of high-end servers unveiled in April called Power8, which it says can churn through massive data sets at record rates.

As I often point out, attractive investing bargains often appear to be damaged goods. That doesn’t scare me. What I want to see is if management realizes the problems and is working to correct them.

Posted by on May 22nd, 2014 at 8:29 pm


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