Something new at IBM, though it feels familiar
BM
this year is still expected to generate profit of $16 billion. That is
about $3 billion less than last year, but this remains a company that is
producing immense profit.
AM
Sacconaghi of Bernstein Research asked the money question during a
conference call hosted by IBM last week: "Is there a crisis at IBM?"
The reply from Virginia M Rometty, IBM's chief executive, was by turns measured and impassioned. The technology industry, she said, was going through a period of "unprecedented change," but IBM was taking a "series of very bold actions" to successfully navigate the transition in the long term, despite the company's financial setback in the third quarter.
"We've got to reinvent ourselves," Rometty said, "as we've done in previous generations."
The big reinvention, of course, came in the 1990s. Early in that decade, the profitability of IBM's mainframe business was collapsing and the company was in a tailspin, before it turned itself around.
Last week's earnings surprise has prompted comparisons with IBM's predicament of two decades ago. The situation, in fact, is significantly different in most respects. In 1993, when Louis V Gerstner Jr was brought in as the first outsider to head IBM, the company was in dire financial straits. By contrast, IBM this year is still expected to generate profit of $16 billion. That is about $3 billion less than last year, but this remains a company that is producing immense profit.
My colleague Andrew Ross Sorkin wrote a column last week looking at IBM's sizable stock buyback programme. The theme that IBM's profit performance relies as much on financial engineering as on computer engineering has been around for a long time, back to the Gerstner era. And it is a fair comment. The buyback programme started under Gerstner, picked up under his successor, Samuel J Palmisano, who became chief executive in 2002, and accelerated further under Rometty. In the five years before Rometty became chief executive in 2012, IBM bought an average of 4.5% of its shares a year. In her tenure, that percentage has climbed to 6.5%.
So IBM has relied increasingly on share buybacks to hit its earnings-per-share targets. But the notion that IBM has mortgaged its future to do so is a hard case to make. The evidence is notably thin. IBM's spending on research and development as a share of revenue is 6 percent, the same share as it was in 2000.
Some on Wall Street have suggested that if IBM was not buying back its shares, it could have made a big "transformative" acquisition instead of the many smaller ones that IBM then grafted onto its software and services businesses. The most comparable technology company to IBM is Hewlett-Packard. HP has made big corporate purchases over the years, including Compaq, EDS and Autonomy. The track record clearly favors IBM's more disciplined approach.
Under Rometty, IBM has made multibillion-dollar investments in fields that are growing rapidly, including data analytics, cloud computing and its Watson artificial intelligence technology. Last Monday, Rometty insisted: "The strategy is correct. Now it's our speed of execution that needs to improve."
In a report, Sacconaghi wrote, "While undernourishing for some, 'stay the course' and a focus on its organic growth initiatives (big data, Watson, SoftLayer) is probably the right move, but it squarely places IBM in the 'show me story' camp." (SoftLayer is the cloud computing company IBM bought last year for $2 billion, and IBM is investing an additional $1.2 billion to build more cloud data centers around the world.)
Rometty is certainly correct that speed is the issue for IBM. The company's new businesses are growing rapidly, but they are not yet large enough to make up for the erosion of the profitability of its traditional software, services and hardware lines. And the new businesses like cloud computing and delivering software over the internet as a service are threatening the lucrative old ones.
In enterprise technology, the new things do not ordinarily displace the old products altogether. They are partial substitutes and enough of an alternative to alter the economics of the old business. PC-style, microprocessor-based computers did not replace mainframes. In fact, today's mainframes are doing more computer processing than ever, but they are no longer the money machines they once were. Prices dropped and the economics of the business changed.
That is what happened in the 1990s, and IBM responded by moving to the higher-profit ground of software and services. Now, cloud computing appears to present a similar challenge to IBM's traditional software business and parts of its services business, like maintaining and updating software applications for corporate customers.
The same forces, to be sure, are threatening all the established suppliers of computing technology to corporations. But that doesn't lessen the challenge for IBM. And seeing the issue clearly does not necessarily carry over to solving it.
If today bears little resemblance to 1993 for IBM, what about some years before the full-blown crisis hit? John F Akers, who died this year, was the chief executive who was succeeded by Gerstner. In 1985, my colleague David E Sanger wrote an article for The New York Times Magazine on Akers' efforts to overhaul IBM. In it, Akers declared, "In the last three or four years, we have literally turned the company upside down."
IBM is a very different corporate culture today, in part because of the company's near-death experience in the 1990s. It should be far easier for Rometty to accelerate the "speed of execution," as she put it. Still, there are echoes of the past in the job she faces.
The reply from Virginia M Rometty, IBM's chief executive, was by turns measured and impassioned. The technology industry, she said, was going through a period of "unprecedented change," but IBM was taking a "series of very bold actions" to successfully navigate the transition in the long term, despite the company's financial setback in the third quarter.
"We've got to reinvent ourselves," Rometty said, "as we've done in previous generations."
The big reinvention, of course, came in the 1990s. Early in that decade, the profitability of IBM's mainframe business was collapsing and the company was in a tailspin, before it turned itself around.
Last week's earnings surprise has prompted comparisons with IBM's predicament of two decades ago. The situation, in fact, is significantly different in most respects. In 1993, when Louis V Gerstner Jr was brought in as the first outsider to head IBM, the company was in dire financial straits. By contrast, IBM this year is still expected to generate profit of $16 billion. That is about $3 billion less than last year, but this remains a company that is producing immense profit.
My colleague Andrew Ross Sorkin wrote a column last week looking at IBM's sizable stock buyback programme. The theme that IBM's profit performance relies as much on financial engineering as on computer engineering has been around for a long time, back to the Gerstner era. And it is a fair comment. The buyback programme started under Gerstner, picked up under his successor, Samuel J Palmisano, who became chief executive in 2002, and accelerated further under Rometty. In the five years before Rometty became chief executive in 2012, IBM bought an average of 4.5% of its shares a year. In her tenure, that percentage has climbed to 6.5%.
So IBM has relied increasingly on share buybacks to hit its earnings-per-share targets. But the notion that IBM has mortgaged its future to do so is a hard case to make. The evidence is notably thin. IBM's spending on research and development as a share of revenue is 6 percent, the same share as it was in 2000.
Some on Wall Street have suggested that if IBM was not buying back its shares, it could have made a big "transformative" acquisition instead of the many smaller ones that IBM then grafted onto its software and services businesses. The most comparable technology company to IBM is Hewlett-Packard. HP has made big corporate purchases over the years, including Compaq, EDS and Autonomy. The track record clearly favors IBM's more disciplined approach.
Under Rometty, IBM has made multibillion-dollar investments in fields that are growing rapidly, including data analytics, cloud computing and its Watson artificial intelligence technology. Last Monday, Rometty insisted: "The strategy is correct. Now it's our speed of execution that needs to improve."
In a report, Sacconaghi wrote, "While undernourishing for some, 'stay the course' and a focus on its organic growth initiatives (big data, Watson, SoftLayer) is probably the right move, but it squarely places IBM in the 'show me story' camp." (SoftLayer is the cloud computing company IBM bought last year for $2 billion, and IBM is investing an additional $1.2 billion to build more cloud data centers around the world.)
Rometty is certainly correct that speed is the issue for IBM. The company's new businesses are growing rapidly, but they are not yet large enough to make up for the erosion of the profitability of its traditional software, services and hardware lines. And the new businesses like cloud computing and delivering software over the internet as a service are threatening the lucrative old ones.
In enterprise technology, the new things do not ordinarily displace the old products altogether. They are partial substitutes and enough of an alternative to alter the economics of the old business. PC-style, microprocessor-based computers did not replace mainframes. In fact, today's mainframes are doing more computer processing than ever, but they are no longer the money machines they once were. Prices dropped and the economics of the business changed.
That is what happened in the 1990s, and IBM responded by moving to the higher-profit ground of software and services. Now, cloud computing appears to present a similar challenge to IBM's traditional software business and parts of its services business, like maintaining and updating software applications for corporate customers.
The same forces, to be sure, are threatening all the established suppliers of computing technology to corporations. But that doesn't lessen the challenge for IBM. And seeing the issue clearly does not necessarily carry over to solving it.
If today bears little resemblance to 1993 for IBM, what about some years before the full-blown crisis hit? John F Akers, who died this year, was the chief executive who was succeeded by Gerstner. In 1985, my colleague David E Sanger wrote an article for The New York Times Magazine on Akers' efforts to overhaul IBM. In it, Akers declared, "In the last three or four years, we have literally turned the company upside down."
IBM is a very different corporate culture today, in part because of the company's near-death experience in the 1990s. It should be far easier for Rometty to accelerate the "speed of execution," as she put it. Still, there are echoes of the past in the job she faces.
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