By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
Eight years of pure Chinese water torture for IBM shareholders ended when Ginni Rometty, CEO since 2012, finally announced her resignation – and the shares surged 4% amid a coronavirus stock market panic on the NYSE. IBM’s revenues fell 27% and share price lost 25% in Rometty’s tenure, which coincided with history’s most spectacular technology bull market. IBM inexplicably ceded the public cloud to an online retailer (Amazon AWS) its software archrival (Microsoft Azure) and a global search engine (Google Cloud). IBM, with its 350,000 employees worldwide, became the butt of jokes in the Valley and Wall Steet for its abysmal failure to generate revenue growth or leverage its formidable global enterprise installed base in software, services and IT consulting. In 2012, IBM and Microsoft boasted similar market caps – now Microsoft is worth $1.37 trillion and trades at 34 times earnings while IBM is valued at $126 billion and trades at a mere 10 times earnings. Big Blue’s fall from grace is a Sophoclean tragedy of hubris followed by a shameful nemesis. Why? Forgive the horrible pun, but it is really elementary, my dear Watson.
The Street loved Ginni Rometty as a human being but her performance as IBM CEO was beyond dismal and, frankly, IBM’s entire board should be sacked for its decade of unmitigated failure. F. Scott Fitzgerald, the chronicler of Jazz Age New York, once wrote that “there are no second acts in American life”. I thought this existential reality was true in Silicon Valley until Satya Nadella resurrected Microsoft in 2013 from Steve Ballmer’s “lost decade” and reinvented it for the Digital Age with its hypergrowth Azure cloud platform. Satya Nadella’s Mister Softy saw its share price surge from 30 to 176, a trillion dollar fiesta of wealth creation that I was lucky enough to flag for my readers in my UAE/GCC financial media columns since literally Day One seven years ago when the share price was 26.
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Now Arvind Krishna, an IBM lifer, a technologist who has never run any major business, let alone a turnaround, until Ginni handed over the reins of Big Blue’s Cognitive and Cloud Computing Division, is Rometty’s successor as the tenth chairman/CEO in the 108 history of IBM. This is a bad cosmic karma. Satya Nadella was running Microsoft’s critical Servers & Tools empire for decades before he became CEO, whacked the disastrous Nokia smartphone joint venture and bet the Evil Empire of Redmond on technology (and humanity’s) migration to the public cloud.
Will Arvind Krishna have the vision, guts, political clout and management/execution genius to replicate Nadella’s spectacular track record at IBM? I doubt it. After all, IBM is an enterprise based software infrastructure company with a colossal zero growth legacy business. Its transition to the cloud will be far more traumatic than anything Nadella faced in 2013. Moreover, 2020 is not 2013 and the Big Three incumbents in the public cloud – AWS, Azure and Google Cloud will be impossible for IBM to dislodge.
While I disagree with a Silicon Valley VC partner who said “not even Jesus Christ can resurrect Big Blue”, I do not believe Arvind Krishna will conjure a five bagger investor fairytale in IBM, as Nadella did with Microsoft. That does not mean there is no serious money to be in this sick puppy’s convalescence on the Big Board. IBM’s $34 billion acquisition of Red Hat is a game changer. Red Hat’s CEO Jim Whitehurst, a vastly experienced technology manager, now becomes IBM’s President. Krishna and Whitehurst could morph into a “dream team” or gamble away the future in a boardroom power struggle. Gibbons history of the Roman Empire in the third century A.D taught me that co-emperors are not a formula for stability at the pinnacles of power. Ultimately, only time tell and the stock price will reflect the unborn future.
I expect Krishna and Whitehurst will focus on the low hanging fruit at IBM – slash the payroll by at least 100,000. A company with 350,000 workers worldwide whose revenues have fallen 27% since 2012 is obviously both hopelessly overstaffed and a managerial nightmare. IBM needs a seismic culture shift too. IBM’s free cash flow was $18.2 billion in 2012 and declined to $11.9 billion in 2019. Somebody is seriously delusional or incompetent just below the now dethroned Queen Ginni. Big Blue needs a cultural transformation on a global scale, not just a change in leadership in the C-suite. True, Rome was not built in a day but it was not built without marble either (Octavian’s marble!). Has Krishna achieved anything remotely “turnaround” in his career as an IBM engineer? Absolutely not. Yet he can understand the logic of cost cutting, the need to boost operating margins and accelerate the shift into cloud/cognitive computing, the division that includes Watson and Red Hat.
IBM’s IT services business is its Achilles heel as it has its lunch eaten by Accenture, TCS, Infosys and Wipro. IBM needs to upgrade its cloud infrastructure business since AWS, Azure and Google Cloud have gutted its enterprise software/services/consulting business model. IBM needs to continue its $10 billion Rometty’s asset sales program – Big Blue once made PC’s, disk drives and even electric typewriters. IBM’s outsourcing business needs to be sold. Its post deal merger integration track record has been mediocre at best in the past decade. IBM needs to reinvest in its research and development/data analytics franchise if it is to compete with software colossi Amazon, Microsoft and Google in the public cloud/SaaS space.
Can IBM really attract the world’s top software engineering talent? No. Can IBM execute on a global scale as well as its archrivals Microsoft and SAP in the fiercely competitive, Darwinian IT world? No. Can Krishna take the big bold decisions Nadella took to reinvent Microsoft since 2013 – axe the Nokia project, fire thousands of surplus staff in a series of corporate restructurings, invest billions of dollars in Azure, embrace the open source and make takeover bids for LinkedIn and Git Hub? Time will tell but an electrical engineering Ph.D who was Ginni’s technology consigliere since 2012, Krishan has not exhibited an iota of strategic brilliance – quite the opposite, in fact, if the Rometty era is judged from the perspective of growth, cash flow, EPS and market share. As a technologist, Krishna could not even commercialise IBM’s R&D prowess or introduce new products and grasp market opportunities remotely as well as Nadella’s Microsoft. A genius and a plodder, alas, are two entirely different beasts and both recognize each other instinctively. This is one lesson I have learnt in the Dubai investment business.
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Victor Hugo said nothing can stop the spread of an idea whose time has come but the Age of Cloud began a decade ago and IBM did not win the prize, it bungled the race. Structural forces in global technology mean that IBM’s turnaround will be much less spectacular than Nadella’s Microsoft, even if Krishna turns out to have the strategic brilliance of Lou Gerstner, the sales fire of Sam Palmisano and the entrepreneurial flair of Thomas Watson Jr.
So will the best and brightest of Armonk deliver a 500% fairytale to IBM shareholder? No way. Yet a modest pop from 140 to 175 to enable me to pocket $47 a share in 0.7 delta CBOE options on Big Blue while the world awaits/dreads a second Black Death in the next six months? Now that is for me to know and you to find out LOL! I hope Krishna succeeds in his mission but I also know that hope is not a strategy and have learnt the hard way that hope can get you killed in the global markets. That much, at least, is certain.