Some Raging Bull Insights on IBM.....Old School.com....FYI...
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Oldschool.com
May 18, 1999 - 2:30 PM
By Claude P. d'Hermillon, Jr.
It's a cliche more often associated with jocks and prom queens than aging computer companies, but the phrase, "you can never go back", continues to resonate in the minds of IBM watchers who aren't convinced the tech giant can find its way into the 21st century.
That's because, as the Dells (DELL) and Microsofts (MSFT) of the New Economy corral markets like they are pigs in a poke, International Business Machines Corp.'s (IBM) position in the computing industry steadily erodes. Big Blue's revenue growth last year ticked up a paltry 4%, while the rest of the industry grew at twice that rate, according to International Data Corp.
There is, of course, an altogether different school of thought which is convinced the once-peerless company is well on its way back to corporate prominence and fiscal respect. To that group, IBM is nothing short of the next big Internet play, with far-flung divisions firing on all eight cylinders and driving the company's share price through the roof, thanks entirely to Chief Executive Louis V. Gerstner Jr.'s steady hand.
The question is, which perspective is closer to reality?
Based on recent performance, Big Blue is walking and talking like a company on the mend. Following several quarters of sluggish growth, the Armonk, N.Y., company is now beating its chest about sales in the first quarter which rose 15% from a year ago, pushing profits up by a hefty 42%.
IBM's first-quarter net income rose to $1.47 billion, or $1.55 a diluted share, from $1.03 billion, or $1.06 a share, in 1998. The rise represented growth that no one anticipated, especially from hardware sales, which soared 17%. Analysts had called for the division to post anemic growth in the 2% neighborhood. Overall earnings per share came in nearly 10% better than the $1.41 a share analysts had expected. After two years of sub-5% growth, those same analysts now expect revenue for the year to climb by more than 10%, to $90 billion.
Lou's Love-in
Less than a month after the quarter ended, Gerstner huddled with money managers and analysts in New York, where the words he uttered sent IBM's stock up 20 3/8, to a record close of 245 1/2 the following day. Trading in the Dow component was so brisk that it accounted for nearly 90 points of the Dow Jones Industrial Average's 106.82-point gain that day, convincing the Street's big money that Big Blue was back.
Gerstner's speech bore the news that the world's largest computer maker now gets a quarter of its annual revenue - $20 billion - from Internet products and services. That prompted Merrill Lynch to issue a report headlined, "Gerstner the Great," while PaineWebber gushed, "IBM = Internet Business Machines."
Based on Gerstner's spin, that breed of revenue is all part of IBM's grand plan to position itself at the nexus of the New Economy. Back in 1997, Big Blue launched its high-profile "e-business" initiative, which was engineered, in effect, to re-brand the company as an Internet enabler.
It Takes A Plan
According to that strategy, IBM's old-line divisions - hardware, software and services - have been retooled to weave corporate computer networks into commerce-ready Web sites. On the hardware front, IBM has been pushing its mainframe computers as the ultimate tool for consolidating a business's disparate servers, while its software-sales force touts its ability to link a company's customers to its corporate database. That's where IBM's service division comes into play, managing the whole bucket of silicon around the clock. In fact, it's the services division that Gerstner believes will drive IBM forward. According to his own remarks, Gerstner expects a full 60% of all money spent on Web initiatives will go to services, rather than hardware or software.
In the first quarter, IBM reportedly sold about $2.5 billion of products and services over the Internet, a figure the company expects to grow to between $10 billion and $15 billion by year's end. Taking a page from the "we make money the old fashioned way" book, Gerstner made it abundantly clear that unlike most Internet ventures out there, IBM is actually generating earnings today.
The CEO's oft-quoted remark that sales from IBM's Internet businesses alone clobbered the combined sales of the top 25 pure-play Internet companies is telling. Those firms are still in the so-called brand-building stage where they're expected to spend like drunken sailors, but Big Blue's $20 billion in Net revenue represents real cash. The top 25 Internet companies combined brought in a scant $5 billion of annual revenue, with a collective loss of $1 billion. That's from the likes of America Online (AOL), Amazon.com (AMZN), Yahoo (YHOO), eBay (EBAY) and E*Trade (EGRP), according to an IBM survey.
That, of course, is comically tempered by that same group's combined valuation, which is 50% greater than IBM's $200 billion-plus market cap.
Still, skeptics remain, well, skeptical that a company with IBM's baggage can recast itself as an Internet linchpin. They argue that not only will such a metamorphosis require Big Blue to recapture its former glory, but it'll also have to train its many divisions to move in unison toward the online marketplace. The metaphors are trite but accurate. Like placing a square peg in a round hole or turning an aircraft carrier on a dime, both can be done, but at what cost to the entire operation?
Are You Being Served?
At the heart of the problem, critics say, is IBM's intent to be all things to all customers. It wants to provide clients with not only products, but entire systems comprised of hardware, software and a full compliment of administrative services. It's a model based on vertical integration, and one that could ultimately dilute the company's focus. That's because such an approach brings with it an almost socialistic mandate wherein the greater good is paramount. Instead of doing one thing - like selling hardware - exceptionally well, the company must ensure that each and every division posts at least moderately acceptable growth in order to protect its bottom line.
That can be distracting, particularly when a non-IBM product or service is where the market wants to be. While hardware, for example, artificially props up the software group by pre-loading Big Blue's OS/2 operating system, the company as a whole could be losing sales to other vendors which sell Windows NT-loaded machines.
As Upside Today recently observed, "If IBM merely transforms itself into a services company - a fate that many analysts think likely - then Big Blue's current success may be just the last dance for a company whose time has come and gone." Indeed, as Upside pointed out, IBM shareholders could awaken one day soon to find their nest eggs staked to a services company that's been saddled with uncompetitive hardware and software businesses. It happened to Unisys Corp. (UIS) in the 1970s and Digital Equipment Corp. in the 1980s.
Then again, shareholders could also fall asleep to the news of a two-for-one stock split, having watched IBM's stock rocket through Merrill Lynch's $270 target price in just two months' time. >>
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Regards,
Scott |
