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Volume 4, Issue 92
December 9, 2004
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The Good, the Bad and the Ugly
As IBM sells off more of itself, the consequences are greater than most investors realize.
Wall Street can be an emotionally weird place. What often is seen as good for business is just as often bad for people – what is deemed good for shareholders is actually just a smokescreen for what’s convenient for insiders and profitable for management.
Corporate strategy, on its face, can turn disaster into a field of daisies. But turn it upside down and flip it inside out, give it a little time to simmer, and it’s still disaster. I’m wondering if this isn’t the ultimate consequence of IBM’s impending decision to off its PC business – the cheers from Wall Street analysts in the loge seats notwithstanding.
According to its corporate playbook, if all goes well this week, IBM (NYSE: IBM) will be up to $2 billion richer and at least one personal computer business smaller. In its bid to shed itself of lower margin divisions that have dragged at its valuation in favor of higher margin software and services offerings, Big Blue will finally exit an industry it helped form more than 20 years ago.
The company had already decided to dump its memory chip and storage businesses in the late 90’s, and sold its PC production operations in the United States to contract manufacturer Sanmina-SCI two years ago. It has since relied on outsourced contractors such as Taiwan's Wistron and Quanta Computer for PC desktop and notebook production. If it now offloads the rest of its PC business to what is apparently at least one Chinese suitor, Hong Kong-based Lenovo Group Ltd., it will rid itself of not only little black boxes but will leave behind most of its contact with individual consumers, not to mention a good chunk of its employees.
From a business strategy standpoint and according to Harvard MBAs (and their professors) this is all good stuff. Analysts applaud it, and if it’s the bottom line we’re looking at, who could argue with Big Blue’s moves?
The problem, of course, is that such decisions have consequences – and even those consequences have consequences. The first is that all of those displaced workers who used to enjoy good livings putting IBMs PC business on the map have now found their middle-class livelihoods enjoyed by Chinese, Japanese, and Indian counterparts. Our loss is their gain – that’s life and that’s globalization.
Yet, the further consequences are more worrisome, and have implications that should not be lost on investors. The problems that arise when companies such as IBM ditch billion dollar businesses – selling them off as easily as pez dispensers on eBay (Nasdaq: EBAY) – are that multiple industries take a hit. Parts suppliers and benefits contractors lose out. Retail businesses in once healthy communities suffer. Even what should have once been fully funded pension funds suddenly come up half empty. This isn’t a liberal lament on the evils of outsourcing – it’s a legitimate concern regarding the financial health and well-being of all other publicly traded companies that find their bottom lines hurting when Americans lose their jobs.
Retail sales suffer and Christmas holiday shopping takes a turn for the worse. Home builders, contractors, building supply companies, mortgage brokers and financial services providers find themselves pinched. Then, though they appear either oblivious or surprised, politicians and state government officials find that tax revenues fall and the costs of social services rise. Watch it happen more than a couple of times and, in aggregate, top line growth of US companies will suffer.
Don’t believe me? Here’s some data. According to a forecast of participants at a Federal Reserve Bank of Chicago, U.S. economic growth is expected to slow in 2005 due to rising interest rates and high crude oil prices. Real gross domestic product (GDP) growth is now forecast at 3.3 percent, down from a projected 4.4 percent this year, with the housing sector seen peaking given rising interest rates. Though investors might not see it – and Wall Street might not wish to -- there is clearly a direct line to be drawn between IBM shedding businesses and GDP forecasts continuing to slide. Take a big chunk of business – and all of the feeder micro-economies tied to it – out of the equation, and we’ve lost far more than one IBM business unit.
I got a taste of this firsthand while visiting the Pacific Northwest last week – an area they used to call the ‘silicon forest.’ A special place that held some of the greatest firepower of American manufacturing when it came to producing wafers for the semiconductor industry. Guys made their livelihoods up there as the middle class boomed off silicon production. That was before high tech took a dive and many of those wafer manufacturers closed up shop and moved back to factories in Asia.
Now, the excitement that marked the early days of wafer manufacturing is gone. And so, too, are other growth businesses that fed off that industry’s success. Housing prices have slumped and retail has flat-lined. Car and truck sales are weak – see GMs (NYSE: GM) latest sales disaster– and the Home Depots (NYSE: HD) and Wal-Marts (NYSE: WMT) of the world find themselves challenged to meet sales goals.
None of this should matter, of course, to IBM -- or to its plans to sell off its PC business. Times change and a company has to protect its profit margins and bottom line. But instead of cheering Big Blue’s decision, if I were a Wall Street economist I’d be far more concerned as to the critical aftermath such decisions leave behind and just how many other companies it will impact. Because when IBM sells off yet another piece of an industry it, and it alone, helped create, it is slowly selling off parts of other American businesses and households which relied so heavily upon it. And as investors are quickly finding out, that has implications far beyond IBM’s stock price next quarter.
Peter D. Henig
Market Columnist
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