IBM - International Business Machines

[Jurgis]

 

Some highly respected CoBF posters made quite convincing bullish arguments for IBM on this board. Do they still believe it's a good long term investment? Were the arguments (subconsciously) influenced by Buffett's position?

 

I sold out in mid 2016 at break even.  The business deteriorated more than what I was expecting so my estimate of IV went down.

 

I estimated IV to be a tad above $200 per share in 2013 and expected it to grow at a modest pace annually. So I bought it when was first available at about $150. My estimate of how the business would progress turned out to be wrong and my IV estimate went down as well. When there did not seem to be much margin of safety I sold.

 

I was conscious of the anchoring bias and I like to think that selling at break even is not due to that but who knows.

 

Buffett's investment is quite consciously an important factor in my purchase primarily because it means that blow up risk is likely low. There is no reason to ignore such an important data point.

 

Vinod

 

Thanks for update. Even though you crossed out highly respected, I think you and KCLarkin post deep well prepared analyses. It would have been nice if you guys posted when your opinion has changed, but of course there's no obligation for you to do that.  8)

 

Good luck.

 

Disclosure: No position. I did not clone this or any other vinod1/KCLarkin positions or rely on their arguments to make investment decisions.  8)

[vinod1]

 

Some highly respected CoBF posters made quite convincing bullish arguments for IBM on this board. Do they still believe it's a good long term investment? Were the arguments (subconsciously) influenced by Buffett's position?

 

I sold out in mid 2016 at break even.  The business deteriorated more than what I was expecting so my estimate of IV went down.

 

I estimated IV to be a tad above $200 per share in 2013 and expected it to grow at a modest pace annually. So I bought it when was first available at about $150. My estimate of how the business would progress turned out to be wrong and my IV estimate went down as well. When there did not seem to be much margin of safety I sold.

 

I was conscious of the anchoring bias and I like to think that selling at break even is not due to that but who knows.

 

Buffett's investment is quite consciously an important factor in my purchase primarily because it means that blow up risk is likely low. There is no reason to ignore such an important data point.

 

Vinod

 

Thanks for update. Even though you crossed out highly respected, I think you and KCLarkin post deep well prepared analyses. It would have been nice if you guys posted when your opinion has changed, but of course there's no obligation for you to do that.  8)

 

Good luck.

 

Disclosure: No position. I did not clone this or any other vinod1/KCLarkin positions or rely on their arguments to make investment decisions.  8)

 

I tend to post when I see the thread pop up in and forget about it otherwise.

 

I would buy IBM again if it dropped in price sufficiently and there are only few other opportunities and cash piling up in portfolio. I usually end up buying and selling the same things again and again if it not a compounder type situation. Hence, my daily prayer "Lord, I do not ask for a bull market, I do not even ask for a bear market, but is it so freakin too much to ask for some volatility?"

 

Vinod

[DooDiligence]

 

Some highly respected CoBF posters made quite convincing bullish arguments for IBM on this board. Do they still believe it's a good long term investment? Were the arguments (subconsciously) influenced by Buffett's position?

 

I sold out in mid 2016 at break even.  The business deteriorated more than what I was expecting so my estimate of IV went down.

 

I estimated IV to be a tad above $200 per share in 2013 and expected it to grow at a modest pace annually. So I bought it when was first available at about $150. My estimate of how the business would progress turned out to be wrong and my IV estimate went down as well. When there did not seem to be much margin of safety I sold.

 

I was conscious of the anchoring bias and I like to think that selling at break even is not due to that but who knows.

 

Buffett's investment is quite consciously an important factor in my purchase primarily because it means that blow up risk is likely low. There is no reason to ignore such an important data point.

 

Vinod

 

Thanks for update. Even though you crossed out highly respected, I think you and KCLarkin post deep well prepared analyses. It would have been nice if you guys posted when your opinion has changed, but of course there's no obligation for you to do that.  8)

 

Good luck.

 

Disclosure: No position. I did not clone this or any other vinod1/KCLarkin positions or rely on their arguments to make investment decisions.  8)

 

I tend to post when I see the thread pop up in and forget about it otherwise.

 

I would buy IBM again if it dropped in price sufficiently and there are only few other opportunities and cash piling up in portfolio. I usually end up buying and selling the same things again and again if it not a compounder type situation. Hence, my daily prayer "Lord, I do not ask for a bull market, I do not even ask for a bear market, but is it so freakin too much to ask for some volatility?"

 

Vinod

 

Come on VIX 20

[sleepydragon]

Trump, the first daughter and a senior advisor at the White House, met with students along with IBM CEO Ginni Rometty, and engaged in a panel conversation on Monday morning, according to Norwalk Public Schools

 

http://wilton.dailyvoice.com/schools/ivanka-trump-meets-with-students-in-norwalk/729228/

 

 

Some Connecticut parents reportedly pulled their kids out of school after first daughter and presidential adviser Ivanka Trump made a surprise visit.

http://thehill.com/blogs/blog-briefing-room/365630-angry-parents-pull-kids-from-class-over-ivanka-trump-visit

 

 

Doesn't seem to be good marketing by IBM ,lol

Sold all my position a while ago

[aws]

Seems like there will be another move down tomorrow on the Red Hat acquisition.  Pretty painful for existing shareholders coming after the earnings disappoint and tech wreck, but might be an interesting opportunity to pick up shares if there is a kneejerk far lower.  If the acquisition doesn't close until late 2019 and share repurchases continue until closing then the share price could be well supported over time.  Dividend yield is already over 5% and I could certainly see the stock dropping enough to close in on 6%.

[gfp]

I wouldn’t want to buy a company that wants to pay this price for this earnings power.  Just a ridiculous deal. This may do in Ronmetty.  They could have bought almost a third of IBM for the cash they are putting out for this deal.  I get that cash flow is higher than net income at Red Hat - but people said Warren had lost it when he bought BNSF for the exact same price.  It earns over $4 billion a year.

[sleepydragon]

Seems like there will be another move down tomorrow on the Red Hat acquisition.  Pretty painful for existing shareholders coming after the earnings disappoint and tech wreck, but might be an interesting opportunity to pick up shares if there is a kneejerk far lower.  If the acquisition doesn't close until late 2019 and share repurchases continue until closing then the share price could be well supported over time.  Dividend yield is already over 5% and I could certainly see the stock dropping enough to close in on 6%.

 

Well, someone shall calculate what’s the stats that a company cuts its dividend after its CEO claimed “there will  be no dividend cut”.

 

[Liberty]

https://stratechery.com/2018/ibms-old-playbook/

[boilermaker75]

https://finance.yahoo.com/news/ibms-board-needs-take-hard-look-ceo-ginni-rometty-191306423.html

[sleepydragon]

https://finance.yahoo.com/news/ibms-board-needs-take-hard-look-ceo-ginni-rometty-191306423.html

 

she has long passed the retirement age of previous IBM CEOs. What a poor job she has done.

[DTEJD1997]

https://finance.yahoo.com/news/ibms-board-needs-take-hard-look-ceo-ginni-rometty-191306423.html

 

she has long passed the retirement age of previous IBM CEOs. What a poor job she has done.

 

Wow, what a "poor" job she has done...what an understatement.

 

I watched the talking heads discuss how maybe she needs a wakeup call, or, heaven forbid, she might need to be let go.  They also discussed how difficult it would be to get of her because she is so "connected" to Davos, the White House, and other heavy hitters.  Yet, nobody said it might be difficult to get rid of her because she is a woman.  Could that play a factor?

 

I can't say for say for sure, as I've not watched IBM too closely.

 

It seems to me though the acquisition of Red Hat is almost like the village idiot buying a bag of magic beans on the way to market.  $35BB is the purchase price.  The P/E is something like 112?  EBIDTA for RHT is something like $600MM? 

 

Let us be generous and assume that IBM can keep everything afloat & integrate RHT reasonably well & quickly.  How does that add value to IBM?

 

IBM doesn't have the cash to for the acquisition...so they are either going to have to borrow OR float more IBM shares.  My guess is that IBM takes on more debt.  Somewhere in the range of $25BB to $30BB maybe?

 

Now IBM is going to have something like $70BB to $75BB in debt?

 

RHT's earnings won't come ANYWHERE close to covering the interest payments for it's acquisition...not even close.

 

The brain trust at IBM is so deficient, they can't come up with a LINUX version of their own, so they go out and buy RHT at 10X revenue?  at 24X book value?

 

Heck, give me a couple hundred motivated computer science Klingons, a couple billion in the bank, 3 years, and a couple hundred million in advertising and promotion...and I would wager you'd do better than this acquisition.

 

Seems like IBM is soft in the head and they just got rolled.

 

/rant off

[DTEJD1997]

Hey all:

 

One thing I forgot to rant about is that IF IBM is borrowing a significant portion of the RedHat purchase price...they very well could be "betting the company".

 

IBM already has a significant amount of debt.  The purchase is not going to be self funding.  Good chance that we are at/near the top of an economic cycle. 

 

Adding TONS of leverage to a company at/near the top of the economic cycle could NOT POSSIBLY have anything go wrong with it!

[Gilp]

https://finance.yahoo.com/news/ibms-board-needs-take-hard-look-ceo-ginni-rometty-191306423.html

 

she has long passed the retirement age of previous IBM CEOs. What a poor job she has done.

 

 

 

 

Heck, give me a couple hundred motivated computer science Klingons, a couple billion in the bank, 3 years, and a couple hundred million in advertising and promotion...and I would wager you'd do better than this acquisition.

 

Seems like IBM is soft in the head and they just got rolled.

 

/rant off

 

The interesting part will be if some of the Red Hat guys will decide that IBM is not for them and start their own thing.

[frommi]

Hey all:

 

One thing I forgot to rant about is that IF IBM is borrowing a significant portion of the RedHat purchase price...they very well could be "betting the company".

 

IBM already has a significant amount of debt.  The purchase is not going to be self funding.  Good chance that we are at/near the top of an economic cycle. 

 

Adding TONS of leverage to a company at/near the top of the economic cycle could NOT POSSIBLY have anything go wrong with it!

 

That was my reason to exit IBM. I also don`t think the dividend is safe anymore going forward. It really looks like they realized that they are not able to turn the current business around and have to go all in. After Q2 i thought that they maybe have a decent chance, but Q3 numbers and the aquisition together really have killed any confidence for a turnaround. But what i also took from it is that cloud going forward gets commoditized because switching costs between AWS,Azure and Google cloud are zero if you use the right approach. Doesn`t bode well for MSFT and AMZN.

[Broeb22]

 

But what i also took from it is that cloud going forward gets commoditized because switching costs between AWS,Azure and Google cloud are zero if you use the right approach. Doesn`t bode well for MSFT and AMZN.

 

Frommi, can you elaborate on this point? I’ve long been concerned about commoditization in the cloud business, which is one reason I have not been able to more seriously consider an investment in AMZN at anything near the current price.

 

I suppose one counter argument could be that banking is commoditized, but deposits are sticky because there is inertia to moving your account for a slightly better rate/online user experience/branch experience.

[Spekulatius]

IBM is going to stop their stock buybacks for a couple of years to reduce debt. The Redhat acquisition can only pay off, if they can substantially increase this business by using their existing customer base and sales channels. IBM value is mostly in its customer relations and sales & marketing organization at this point, their R&D is just maintenance to prevent their existing  franchises from melting to fast, hence acquisitions are necessary to keep this company afloat.

[boilermaker75]

https://finance.yahoo.com/news/ibms-board-needs-take-hard-look-ceo-ginni-rometty-191306423.html

 

she has long passed the retirement age of previous IBM CEOs. What a poor job she has done.

 

Wow, what a "poor" job she has done...what an understatement.

 

I watched the talking heads discuss how maybe she needs a wakeup call, or, heaven forbid, she might need to be let go.  They also discussed how difficult it would be to get of her because she is so "connected" to Davos, the White House, and other heavy hitters.  Yet, nobody said it might be difficult to get rid of her because she is a woman.  Could that play a factor?

 

I can't say for say for sure, as I've not watched IBM too closely.

 

It seems to me though the acquisition of Red Hat is almost like the village idiot buying a bag of magic beans on the way to market.  $35BB is the purchase price.  The P/E is something like 112?  EBIDTA for RHT is something like $600MM? 

 

Let us be generous and assume that IBM can keep everything afloat & integrate RHT reasonably well & quickly.  How does that add value to IBM?

 

IBM doesn't have the cash to for the acquisition...so they are either going to have to borrow OR float more IBM shares.  My guess is that IBM takes on more debt.  Somewhere in the range of $25BB to $30BB maybe?

 

Now IBM is going to have something like $70BB to $75BB in debt?

 

RHT's earnings won't come ANYWHERE close to covering the interest payments for it's acquisition...not even close.

 

The brain trust at IBM is so deficient, they can't come up with a LINUX version of their own, so they go out and buy RHT at 10X revenue?  at 24X book value?

 

Heck, give me a couple hundred motivated computer science Klingons, a couple billion in the bank, 3 years, and a couple hundred million in advertising and promotion...and I would wager you'd do better than this acquisition.

 

Seems like IBM is soft in the head and they just got rolled.

 

/rant off

 

“I always invest in companies an idiot could run, because one day one will.”

— Warren Buffett

 

He figured it out before it hurt too much.

[frommi]

Frommi, can you elaborate on this point? I’ve long been concerned about commoditization in the cloud business, which is one reason I have not been able to more seriously consider an investment in AMZN at anything near the current price.

 

I suppose one counter argument could be that banking is commoditized, but deposits are sticky because there is inertia to moving your account for a slightly better rate/online user experience/branch experience.

 

Take anything i write with a grain of salt, i am probably wrong. But i think the next generation of cloud applications will be built using platform (AWS,Azure,...) independent frameworks, where you can switch to another cloud with a click and some minor adjustments. At that point the cheapest cloud that does the trick will win and the providers have zero pricing power.

[Dynamic]

I think IBM has been a good and relatively cheap lesson for me about knowing your investees and the quality and predictability of their business and not seeking diversification at the expense of quality or being impatient to invest funds. I guess I'm taking Charlie Munger's ideas about diversification and high conviction ideas to heart!

 

I was saved from absolute loss of capital (but not from relative underperformance) by getting a reasonable margin of safety on my purchase price then changing my mind (perhaps a little late) when the story was clearly changing and instead going for quality I deeply understood at a reasonable price, reinvesting my IBM sale proceeds along with WFC proceeds into BRK.B.

 

I only took a tiny position on 24 Feb 2016 for an effective cost of about $131.70 per share, at about 3.95% dividend yield, about 8.5% earnings yield, and anticipating continued buybacks, but amid declining revenues and currency headwinds. I saw that they didn't rely much on capital to produce earnings, and saw potential for stabilised earnings, declining share count and growing dividends to provide decent returns. I wrote in my purchase notes: "Potential for 10% compounded dividend growth ($8.40 in 2021-2, $13.50 in 2026-7, $35.00 in 2036-7, payback of purchase price by 2028), at 7% payback by 2030, at 5% payback by 2032). Assuming selling for similar yield of 3.95%, expect annualised total return to be 3.95% + dividend growth rate."

 

The story seemed to have changed by mid 2017/early 2018 and IBM wasn't executing to management's plan, which perhaps was overly ambitious. As I had another fairly-priced high quality opportunity in Berkshire Hathaway with very limited downside, consistent compounding and no dividends to lose 30% withholding tax on, I switched horses. I also did the same switching out of a 4-5% position in troubled and likely stagnant Wells Fargo with an OK but slightly sub-par gain. My interest in switching out of IBM was partly spurred by Berkshire's significant reductions and had been brewing in my brain for some time before I finally decided Berkshire's limited downside and consistent compounding looked like the better place for my money. Much the same was true of my switch from Wells Fargo to BRK.B

 

I ended up selling on 08 Feb 2018 for around $151.50 (but still collecting the Feb dividend on 13 March, less 30% withholding tax) to have a total return of 20.02% in my home currency, GBP, or 9.99% IRR (in GBP), net of withholding tax but with no Capital Gains Tax to pay. That IRR was 5.07% behind than FTSE100-TRI, and was 11.79% behind than SP500TR (in GBP) over the same period.

 

Since switching, BRK.B has fluctuated and gained about 3.6% to date, but edged ahead of IBM, before IBM lost 24% of what I sold it for but is paying dividends. Net of dividends, I'd say BRK.B is suddenly about 26% ahead mostly by not losing market value, while I feel it's still undervalued. I guess I was lucky to get out when I did before IBM's Intrinsic Value per share has to my mind substantially declined, thanks in part to this seemingly pricey Redhat acquisition, and in part to erosion from the stiff wind of competition.

[DTEJD1997]

Hey all:

 

Anybody else looking at long dated PUTS on IBM?

 

The more I read about the RedHat acquisition, the more amazed I am at the purchase price.

 

I am just wondering how fast it unravels for IBM.

 

How many programmers/technicians leave RedHat/IBM to strike out on their own?  Or maybe go to a smaller company where their work would make more of a difference?

 

How much further does IBM's existing business contract/unravel?

 

How soon before IBM is hit with a rating downgrade due to their exploding debt situation?

 

How soon before IBM is forced to issue more equity to try and get their balance sheet in better condition?

 

I just don't see how this situation ends in anything other than calamity for current shareholders.

[NBL0303]

Hey all:

 

Anybody else looking at long dated PUTS on IBM?

 

The more I read about the RedHat acquisition, the more amazed I am at the purchase price.

 

I am just wondering how fast it unravels for IBM.

 

How many programmers/technicians leave RedHat/IBM to strike out on their own?  Or maybe go to a smaller company where their work would make more of a difference?

 

How much further does IBM's existing business contract/unravel?

 

How soon before IBM is hit with a rating downgrade due to their exploding debt situation?

 

How soon before IBM is forced to issue more equity to try and get their balance sheet in better condition?

 

I just don't see how this situation ends in anything other than calamity for current shareholders.

 

How much debt will IBM have upon closing the acquisition?

[DTEJD1997]

How much debt will IBM have upon closing the acquisition?

 

That is the multi-billion dollar question.

 

My interweb & Google Fu skills are not what they should be.

 

Near as I can tell, IBM will not be issuing shares in the buyout and they are paying CASH MONEY!

 

At this point in time, it appears that IBM will have cash of about $14.5BB & debt of $47BB.

 

Current depressed market cap is only about $110BB.  The acquisition is about 1/3 of the company.

 

They are paying $34BB.  So I presume that they will borrow ALL of that.

 

After the acquisition, cash will be about $15BB & debt of $81BB?

 

IBM only has EBIDTA of about $17BB?

 

If IBM is paying 4% on that outstanding debt, that is about $3BB a year in interest expense?  Maybe more?

 

I would be surprised if cash flow from the acquisition even pays the interest on the debt used to finance it.

 

IBM still needs some amount of cash flow to fund manufacturing & operations & such.  What would that be?  $5BB? maybe more?

 

IBM also pays a dividend of something close to $5.5BB a year.

 

To pay interest on the outstanding debt, fund replacement for plant & equipment, and pay out the dividend, IBM will need something like $14BB a year?

 

Only a few billion a year towards debt reduction of $81BB.

 

What if the economy goes south?  What if the acquisition does not work out exactly like expected?

 

First thing to go would be the dividend.  A cut in the dividend would probably send a LOT of investors for the exits.  Cut the dividend in half and add $2.5BB/year in debt reduction, and you STILL have a heavily leveraged company.

 

The RedHat acquisition looks like a poorly conceived move, made of desperation of management.

 

What do I know though?  I'm not the one in charge of a multi-billion dollar company.

[rb]

Yea, I'm pessimistic on this as well. Red Hat was generously priced to start with. I'd say from Red Hat's perspective that huge premium is the price required to sell its soul. Some souls apparently are not cheap.

 

From IBM's perspective, the only way it makes sense is that there a re gonna be HUGE! synergies somewhere. It's not gonna be cost, so they have to be in sales. So what's the game plan here? Are they gonna jam Red Hat products down IBM clients? Push them to start using open source? That's not gonna make this kind of money. So the game plan seems to be that they're gonna jam IBM products down the throats of Red Hat clients. That's a bit of a head scratcher. Aren't Red Hat's clients the ones that wanted to stop paying providers like IBM?

 

This smells a lot like desperation and IBM attempting a Hail Mary. Not very confidence inspiring.

[dwy000]

A good chunk of existing debt is supporting the finance assets ($31bn at last year end) and the debt has come down as those are liquidated.  So corporate debt is probably closer to $15bn.  Company generates FCF of about $13bn from which it pays $5.5bn of dividends.  They've stopped the share buybacks probably hoping to build up a good chunk of cash by time of close.

 

Still a hail mary pass and massive overpayment for Redhat.  I bailed on this last year despite the excellent cash flow as they just can't seem to grow the top line.  I guess they found a way - buy revenues.  I don't think they'll have problems paying for it but I don't see how this is a net positive to shareholders.

[boilermaker75]

How much debt will IBM have upon closing the acquisition?

 

Current depressed market cap is only about $110BB.  The acquisition is about 1/3 of the company.

 

 

If the Red Hat deal is as bad is it seems, at least to most of us here, given the price and use of borrowed funds to pay that price, the market cap may not be depressed, it may be inflated.

 

It is how Rometty can keep her big paychecks coming for a few more years. The acquisition needs time to come to fruition.