Dear Mr. Berko:
Please tell me what you think about buying 100 shares of IBM. Our dentist (also a friend) has been in the market for over 25 years and strongly recommends the stock. He thinks that the new CEO will turn IBM around and that the price could jump 50 percent by late 2015.
— BE, Durham, N.C.
Dear BE:
I think your dentist is using too much nitrous oxide.
Two books, “The Man in the Gray Flannel Suit” and “The Organization Man,” both written in the mid-1950s, still reflect the culture at International Business Machines (IBM-$163.27). In those days, you worked for the organization and the organization owned you. If the organization told you to wear red on Tuesday, you wore a red shirt on Tuesday; you were an automaton, followed instructions, didn’t ask questions and never offered suggestions. And at 5 p.m., everyone went home to a wife, 2.4 kids and a three-bedroom house, and post-dinner, you watched “I Remember Mama” and “The Ed Sullivan Show” on a boxy black-and-white TV.
The culture in IBM’s executive suite is about the same today. However, with new CEO Ginni Rometty, IBM is a little less bureaucratic, a little less rooted in the “Organization Man” culture of former CEOs Tom Watson and Tom Jr. Still, among Standard & Poor’s, Credit Suisse, Goldman Sachs, Argus Financial Services, Zacks, Oppenheimer and Wells Fargo, none has a buy rating on the stock.
IBM is a sales organization, and revenues from its three core businesses — services, software and hardware — are in a downward spiral. IBM is inflexibly huge, and in today’s environment, size doesn’t protect it from emerging long-term threats when customers change their buying habits. Imagine the time it takes for an aircraft carrier to make a 90-degree turn. IBM is like that aircraft carrier, and cloud computing is shifting the enterprise IT landscape, forcing IBM to make course changes. Because computer resources are increasingly delivered by cloud providers rather than traditional enterprise IT departments, the demand for IBM’s high-end servers and software has slowed to a crawl. Additionally, “software as a service” is gaining traction, forcing the middleware and systems management markets to make significant changes. And IBM’s mainframe market is disappearing as new virtualization technologies enable IT people to deploy and manage workloads via a collection of commodity x86 servers. Finally, customers’ appetite for multimillion-dollar IT systems hasn’t recovered from the Great Recession, and a recovery is not expected for a long time.
Everything about this $90 billion-revenue (down from $107 billion in 2011) company is big. Big is safe — like having an elephant in bed with you — but heaven help you if it sneezes and rolls over. IBM’s stock price is down 50 points since Rometty took over in 2012. Revenues have declined for 10 consecutive quarters, and its historic businesses are fading. Still, IBM’s century-old culture hasn’t changed much. Big Blue is too inflexible to learn new dance steps, too huge to respond creatively to changes in the market, too labyrinthine to recognize the problem and find a repair consensus. IBM has more moving parts than a trainload of Swiss watches. The company looks synchronized on the outside (some managers wear golf shirts on weekends), but on the inside, its multilayer executive team is a blueprint for the Tower of Babel.
Rometty has improved IBM’s balance sheet and income statement, though her thousand-watt smile hasn’t motivated the performance of IBM’s marketing people. Rometty has improved net profit margins by 20 percent. She has cut fat and eliminated numerous redundancies, which, combined with fewer outstanding shares, should improve 2014’s income to $16.40 on declining revenues. And in 2015, IBM expects to earn $18.50 on still lower revenues. Rometty has the leadership skills, energy and boldness to move quickly, but working with her 13-member board of directors (average age is 64) is like dragging an anchor. Rometty is a clear communicator, a collaborator and easily approachable, but it may take a lot more to change the dispassionate culture of the gray suits at IBM. The stock price may continue to disappoint investors.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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