January 22, 2014 Leave a comment
IBM: “DEATH BY A THOUSAND CUTS”
After more than 1,100 years, “death by a thousand cuts” was outlawed as form of capital punishment in imperial China in 1905. Yet the gruesome ritual still seems to be practiced on Wall Street today. The latest victim? Big Blue. One of Wall Street’s favorites for more than six decades, IBM seems to be now suffering a slow and tortuous “death by a thousand cuts.” Ironically, China is one of the prominent recent bleeding gashes.
Take a look at the above chart. Each time the market has reacted to disappointing FACTS emanating from Big Blue, Wall Street tried to prop up its darling with a new infusion of blood. Over time, however, that was not enough. The victim’s health kept deteriorating as FACTS prevailed over wishful thinking.
No surprise there. We said nearly two years ago that IBM was in trouble (see Big Blue Feet of Clay – analysis of IBM 1Q12 business results and 5-year forecast, Apr 2012). At the time, the stock was at $207. Today, it is hovering around $181 after another deep cut inflicted by the 4Q13 results, released after the markets closed yesterday.
After three consecutive quarters of disappointing results, now everybody can see that IBM has feet of clay, as we put it back in Apr 2012. Only worse. Not only the IBM hardware is now shriveling up rapidly, but its once buoyant “growth markets” – China, Russia, India, Brazil… – are all shrinking. “Growth markets” declining? A new IBM oxymoron.
And so what’s IBM’s remedy? Same old, same old: Stock buybacks. Can the company keep on shrinking the number of outstanding shares to keep up with its shrinking business? Maybe so for a while. But ultimately, both will lead to extinction. And Wall Street is finally waking up to this reality. IBM has been the worst-performing top IT stock in the last 6 months and the last two years (see the charts below).
IBM: “Rare Type of Organism That Eats Itself Alive” (Wall Street Journal)
“There is a rare type of organism that eats itself alive,” Dennis Berman, a Wall Street Journal columnist, noted in the Journal’s yesterday’s edition (1-21-14). “One of them is International Business Machines Corp.” [IBM -3.28%]
Berman goes on to explain something we have been critically writing about for the last 17 years – that stock buybacks are a sign of corporate weakness, not strength.
“For the past 20 years, IBM has been an avid, methodical buyer of its own stock. In 1993, it had 2.3 billion shares outstanding,” the WSJ notes. “Today it has 1.1 billion, shrinking at more than 1% per quarter over the past few years. At that pace, there will be no more publicly traded IBM shares left by 2034.”
So IBM seems to be pursuing a road to extinction.
Well known Wall Street investor Jim Chanos is starting to worry about just this problem. He is coming around to the idea that buybacks are a sign of corporate weakness, not strength, the WSJ reports.
Which is what we have been saying for the last 17 years. At the IBM 1997 Annual Meeting, this writer questioned the then IBM CEO about the wisdom of this strategy.
“As I stand here before you, I am reminded of the question I asked of one of your predecessors, John Opel, at the Boston Annual Meeting in 1983,” this writer told Gerstner in Dallas, TX on Apr 29, 1997 . ‘Why are you mortgaging IBM’s future?’
“I never thought I’d have to ask the same question again. But here we are, and I do… So Lou Vincent Gerstner – ‘why are you mortgaging IBM’s future?'”
And here we are for the third time in 30 years, having to ask the same question. Why is IBM mortgaging its future?
Because its management lacks both imagination and courage to do anything else except engage in “financial engineering.”
Back in the 1980s, such a lack of vision by John Akers and his predecessors (Opel, Cary) almost ran Big Blue into the ground. In the early 2000s, Gerstner left the company on a similarly perilous course.
It was Sam Palmisano focus on quality over quantity to manage to reverse the trend. For a while. Because even Palmisano lacked the courage for a more radical restructuring. Like breaking up Big Blue into smaller pieces, and pursuing aggressively NEW markets (beyond the corporate dinosaurs, IBM’s favorite customers). Both of them were recommendations this writer made in 1996, and again in 2006 (see Break Up IBM! (Mar. 20, 1996) and Analysis of IBM “state of the union” (Nov 10, 2006)).
No dice. “Big Blue Feet of Clay” remained stuck in place and in its old ways. And now, we are seeing the consequences. Double digit declines in hardware and once “emerging markets.” Shrinkage even of its biggest services business. Dim outlook. A “death by a thousand cuts.”
It is sad to see this once proud and mighty company come to this. But IBM is suffering a fate of its own making: Extinction. It’s just a matter of time. Which is the ultimate destiny of all empires. So the universe is unfolding as it should.
By the way, lest I may be accused of writing more “I told you so” pieces, this will be my final commentary on IBM. Forty four years. Not a bad roller-coaster ride with Big Blue. Thank you, IBM. And farewell.