IBM - International Business Machines

[hardcorevalue]

It feels to me that their moat is shrinking by the day.

[hardcorevalue]

I guess that comment was a bit short, I think I am too used to twitter.

 

I think that the Amazon web services win of the CIA cloud contract a while back was a defining moment. Similar to when Fuji Film outbid Kodak for the olympic advertising rights in 1984. (I think Buffett talked about this moment in regards to Kodak in the past.) Again, everything just seems to be pointing to IBM losing brand value, which Buffett had said was one of his favourite points of the company (reverence for the shareholder still seems high.) No opinion on the stock but I'm not holding it.

 

Also, the second this company abandons its $20 adjusted EPS goal, I'll take a more serious look. These explicit goals can drive some very short term thinking.

[obtuse_investor]

I feel that the $20 EPS target is a lightening rod.

 

It attracts all the attention and detracts, rightfully or wrongfully, from the press discussing the value of the underlying business.

[Palantir]

^Not when the management considers it a primary goal of their operations.

[fareastwarriors]

IBM Faces Further Trouble in China

 

http://www.businessweek.com/articles/2014-05-27/ibm-faces-more-trouble-in-china#r=nav-fs

[fareastwarriors]

Ginni Rometty: Reinventing Big Blue

 

 

http://online.barrons.com/news/articles/SB50001424053111904125704579588221129367930?mod=BOL_GoogleNews

[karthikpm]

fareastwarriors,

 

are you able to post the full article? I don't have access to Barron's

 

 

[fareastwarriors]

fareastwarriors,

 

are you able to post the full article? I don't have access to Barron's

 

attached

Ginni_Rometty_-_Reinventing_Big_Blue.pdf

[karthikpm]

Thanks for sharing. I particularly like the quote about being in the 'cloud" in relation to serving large critical customers like banks etc. AMZN may eventually be a cloud company- but they will destroy everyone's margins to grab share ( as Bezos has done with everything else)

[JAllen]

I have a crazy question for this thread. Has anyone asked why Amazon won the government contract against Ibm when Ibm bid 30% less? I have to check these numbers but i think they are order of magnitude right. So, if true, why? The only thing I can think of is that Bezos is now quite involved with government now that he has the Post.

In other words, are we sure that the contract was won entirely on merit? Some help needed here, please.

 

 

Read the judgment/final court doc.  It explains in detail why the final court said that IBM's appeal never should have been considered seriously in court.

[cayale]

I have a crazy question for this thread. Has anyone asked why Amazon won the government contract against Ibm when Ibm bid 30% less? I have to check these numbers but i think they are order of magnitude right. So, if true, why? The only thing I can think of is that Bezos is now quite involved with government now that he has the Post.

In other words, are we sure that the contract was won entirely on merit? Some help needed here, please.

 

 

Read the judgment/final court doc.  It explains in detail why the final court said that IBM's appeal never should have been considered seriously in court.

 

See the recent BusinessWeek article. It's fairly damning.

[karthikpm]

It's pretty evident that a lot is wrong with IBM.  The thesis to "kill the idea" is pretty strong

What does Buffett see in it that others are not?

[peter1234]

He came in before the recent bad press.

 

- Entrenched in IT departments. Many firms could not replace IBM even if they wanted. He talked to his people (like Matt Rose) in Berkshire.

- Buying back tons of shares

- Setting out and achieving 5 year plans

- Utility like predictable growth in diluted EPS

- Has re-invented itself in the past

 

I have not heard him address current challenges like: cloud, innovation, declining sales, leveraging up, non-GAAP.

 

:)

[Palantir]

^Maybe his thesis is wrong and he is outside his circle of competence?

[KCLarkin]

^Maybe his thesis is wrong and he is outside his circle of competence?

 

He is definitely not outside his circle of competence (unless you think he has lost his mental faculties). He would never put an IT company in his Big Four without being very certain about it. He used to be an IBM competitor. And he has read their annual reports for 50 years.

 

Cloud might be a long-term risk but it is not the source of IBM's current woes (macro headwinds, emerging market weakness, currency, NSA, losing server share to Cisco et al, mainframe product cycle). These are all temporary problems (NSA is the only one that worries me).

 

AWS risk is overstated. Oracle competed for years against MySQL, a free database, yet managed to grow EPS at 15% annually. People who have never worked in an enterprise IT department greatly overestimate how easy it is to switch vendors. Something like 60% of IBM's revenue is recurring backed by long term contracts. Many of these contracts support mission critical portions of the company. In many cases, it would not even be possible to switch vendors and in most others it would not be economically feasible. IBM is embedded in the core of these companies.

 

It is easy to see why Buffett loves IBM. Their capital allocation policy is right out of Buffett's playbook. Modest but growing dividend. Large, opportunistic buybacks. Focus on cash flow over growth. Small bolt-on acquisitions. Properly incentivized management.

[Guest longinvestor]

Thanks for sharing. I particularly like the quote about being in the 'cloud" in relation to serving large critical customers like banks etc. AMZN may eventually be a cloud company- but they will destroy everyone's margins to grab share ( as Bezos has done with everything else)

 

Don't see that as a problem if Amazon stays in business while doing that. Walmart has done that to retail for decades and that is how they win, by driving the weak out. Margin is not an entitlement, no?

[no_free_lunch]

I am still unconvinced that the "cloud" is as much a threat as people think.  Here is my experience with IT projects, others experience may differ.

 

We have some project to bring on a system that integrates with all of our other systems and gives people some new bit of functionality.  After vendor selection, we spend about 2 days installing and doing basis configuration of the software, then 4-8 months doing various integration/testing tasks.  When we go live, we have to redo that 2 day installation plus spend a couple of days implementing our customizations. 

 

With a cloud vendor those 2 day periods drop down to basically nothing.  However, the 4-8 months are still there.  In my experience the 4-8 months are longer but I guess there is no reason that has to be case.  Nevertheless, best case "cloud computing" does nothing to easy my integration tasks which are the vast, vast majority of our time so the cost-benefit that I personally see is pretty minimal.  To me it seems that it is solving all kinds of issues that I don't have.  For software where there is no customization I can see it, but I just don't see that happening very often.  Maybe it's just the nature of the companies I work for.

[Liberty]

I am still unconvinced that the "cloud" is as much a threat as people think.  Here is my experience with IT projects, others experience may differ.

 

We have some project to bring on a system that integrates with all of our other systems and gives people some new bit of functionality.  After vendor selection, we spend about 2 days installing and doing basis configuration of the software, then 4-8 months doing various integration/testing tasks.  When we go live, we have to redo that 2 day installation plus spend a couple of days implementing our customizations. 

 

With a cloud vendor those 2 day periods drop down to basically nothing.  However, the 4-8 months are still there.  In my experience the 4-8 months are longer but I guess there is no reason that has to be case.  Nevertheless, best case "cloud computing" does nothing to easy my integration tasks which are the vast, vast majority of our time so the cost-benefit that I personally see is pretty minimal.  To me it seems that it is solving all kinds of issues that I don't have.  For software where there is no customization I can see it, but I just don't see that happening very often.  Maybe it's just the nature of the companies I work for.

 

Thanks, that's an interesting perspective.

 

How does it change things for maintenance/upgrades/etc? I would expect that always being on the latest version and not having to deal with the servers would help?

[Guest hellsten]

http://www.cringely.com/2014/06/04/decline-fall-ibm/

 

Starting in 2007, during that trip to Minnesota, I saw troubling things at IBM. I saw the company changing, and not for the better. I saw the people of IBM (they are actually called “resources”) beginning to lose faith in their company and starting to panic. I wrote story after story, and IBM workers called or wrote me, both to confirm my fears and to give me even more material.

 

IBM’s performance on its accounts over the last 10 years has damaged the company’s reputation. Customers no longer trust IBM to manage projects well, get the projects finished, or have the projects work as promised. IBM is now hard pressed to properly support what they sell. Those ten years have traumatized IBM. Its existing businesses are under performing, and its new businesses are at risk of not succeeding because the teams that will do the work are damaged.

 

Let’s look to the top of IBM to understand how this happened.

 

“The importance of managers being aligned with shareholders—not through risk-free instruments like stock options, but through the process of putting their own money on the line through direct ownership of the company—became a critical part of the management philosophy I brought to IBM,” claims former CEO Lou Gerstner in his book, Who Says Elephants Can’t Dance?

 

Defying (or perhaps learning from) Gerstner, IBM’s leaders today are fully isolated and immune from the long-term consequences of their decisions. People who own companies manage them to be viable for the long term. IBM’s leaders do not.

 

[no_free_lunch]

I am still unconvinced that the "cloud" is as much a threat as people think.  Here is my experience with IT projects, others experience may differ.

 

We have some project to bring on a system that integrates with all of our other systems and gives people some new bit of functionality.  After vendor selection, we spend about 2 days installing and doing basis configuration of the software, then 4-8 months doing various integration/testing tasks.  When we go live, we have to redo that 2 day installation plus spend a couple of days implementing our customizations. 

 

With a cloud vendor those 2 day periods drop down to basically nothing.  However, the 4-8 months are still there.  In my experience the 4-8 months are longer but I guess there is no reason that has to be case.  Nevertheless, best case "cloud computing" does nothing to easy my integration tasks which are the vast, vast majority of our time so the cost-benefit that I personally see is pretty minimal.  To me it seems that it is solving all kinds of issues that I don't have.  For software where there is no customization I can see it, but I just don't see that happening very often.  Maybe it's just the nature of the companies I work for.

 

Thanks, that's an interesting perspective.

 

How does it change things for maintenance/upgrades/etc? I would expect that always being on the latest version and not having to deal with the servers would help?

 

For maintenance/upgrades if you've customized you absolutely cannot have a software application upgrade itself without you being involved directly.  You need to recheck everything with each upgrade.  It's a very delicate process.

 

There are definitely benefits with the physical server maintenance but again it's a small percent of our time. 

 

I didn't even get into the security/redundancy considerations.

[Palantir]

http://www.cringely.com/2014/06/04/decline-fall-ibm/

 

Starting in 2007, during that trip to Minnesota, I saw troubling things at IBM. I saw the company changing, and not for the better. I saw the people of IBM (they are actually called “resources”) beginning to lose faith in their company and starting to panic. I wrote story after story, and IBM workers called or wrote me, both to confirm my fears and to give me even more material.

 

IBM’s performance on its accounts over the last 10 years has damaged the company’s reputation. Customers no longer trust IBM to manage projects well, get the projects finished, or have the projects work as promised. IBM is now hard pressed to properly support what they sell. Those ten years have traumatized IBM. Its existing businesses are under performing, and its new businesses are at risk of not succeeding because the teams that will do the work are damaged.

 

Let’s look to the top of IBM to understand how this happened.

 

“The importance of managers being aligned with shareholders—not through risk-free instruments like stock options, but through the process of putting their own money on the line through direct ownership of the company—became a critical part of the management philosophy I brought to IBM,” claims former CEO Lou Gerstner in his book, Who Says Elephants Can’t Dance?

 

Defying (or perhaps learning from) Gerstner, IBM’s leaders today are fully isolated and immune from the long-term consequences of their decisions. People who own companies manage them to be viable for the long term. IBM’s leaders do not.

 

Oh man, I can imagine all the cognitive dissonance this book will cause on the board.

[Liberty]

Haven't read it and no idea if it's any good, but thought some of the people in this thread might be interested in having a deeper look:

 

http://www.cringely.com/2014/06/04/decline-fall-ibm/

[Vish_ram]

Haven't read it and no idea if it's any good, but thought some of the people in this thread might be interested in having a deeper look:

 

http://www.cringely.com/2014/06/04/decline-fall-ibm/

 

The author is using sensationalism to make a buck or two. I've no position in IBM. My company uses a lot of IBM products. They have great niche products that beat the bejesus out of Oracle ERP modules. I used to think of IBM as seller of obsolete mainframe, but the products they acquired (like Emptoris, Tririga...) are phenomenal. IBM survived MSFT onslaught, mainframe decline, Indian IT firms...

 

I think even if they are a bunch of mediocre business, given cash flow and buybacks, the stock should give decent returns. It is utter nonsense to talk about fall of IBM.

[KCLarkin]

China Pulling the Plug on IBM, Oracle, Others:

 

http://www.marketwatch.com/story/china-pulling-the-plug-on-ibm-oracle-others-2014-06-26

 

The article is good but I found this quote interesting:

 

"An IT consultant who advises banks said IBM, for example, is so entrenched that China’s banks would likely need about 20 years to replace all IOE systems."

[tombgrt]

Anyone who ever had a job in general banking or insurance at a lower level will have the same experience. I work in life for one of the world's biggest insurers and we still use a ms-dos system that connects to all more modern platforms that we use. Everything is based on that system and wouldn't function without it. It's annoying to use, requires the knowledge of an endless list of codes and shortcuts to examine/adjust contracts, you can't give access to brokers by putting it in the cloud, ...

There is not enough knowledge, budget and time and way to much carreer risk to change to something else so we keep building on the same old system. It's the same for most other bigger companies and one of the many reasons why companies like IBM will do just fine.

 

Buffett is three years in without a profit. I think this is a great time to buy. IBM will likely outperform the S&P500 by a hefty margin over the next few years. No need to overanalyse these things.