IBM, the once-storied technology company, has become a laggard when the world is seeing rapid technological advancements. Since 2010, the stock price has increase +4%, while the S&P 500 has increased +188%. Even more embarrassing, the other industry veterans Apple, Microsoft, Intel and Oracle grew +792%, +414%, +177%, and +128% respectively.
The problem has gotten particularly embarrassing recently. As one analyst put it: “Overall, IBM has underperformed in every metric. This is fully reflected in how the market is currently valuing the company; it has a forward PE ratio of 9.9., compared to Apple and Microsoft at 20 and 28 respectively.” This is likely due to focusing mostly on dividends and share buybacks, not innovation. IBM’s R&D budget is down -8% since 2010, while industry leaders have made big increases; e.g., Intel +139%, Microsoft +94%, and Oracle +85%.
Sadly, as one analyst put it: “The paradox with IBM is that all investors know what the problem is: IBM suffers from bad leadership. The current CEO has been in the job for 7 years, and the stock has declined by -27%, while she pocketed more than $100 million in salary.” That CEO recently announced the 27th quarterly revenue decline during the 30 quarters she has been in charge.
The CEO has been spouting enthusiasm for years regarding IBM efforts in artificial intelligence, cloud computing, health care technology, etc. and basically has nothing to show for it. For perspective, in the area of cloud computing, the hottest area in the industry right now, in the recent quarter IBM increased revenue by +8%, while the #1 player Amazon grew + 35%, and the #2 and fastest growing player Microsoft was up + 59%.
IBM is hoping to start turning this negative situation around with its very recent $34 billion acquisition of Red Hat, which is a leader in hybrid cloud computing. On the other hand, many analysts are worried, because IBM has a track record of acquiring things and under-utilizing what they bought.
Stepping back, why didn’t the IBM board of directors do something years ago about the obvious problem? One key reason is that there are no deep, up-to-date technology experts on the board. Besides the IBM CEO, whose background is sales/ marketing, the IBM board has twelve members: nine CEO’s (all but two are retired) from prestigious companies unrelated to the technology business ( UPS, Emerson Electric, J&J, Dow DuPont, Anthem, Eli Lilly, Shell, AXA Insurance, and Northern Trust), two university presidents, and one retired Navy Admiral.
What to Do?… I believe what needs to happen is for the lead independent director to take charge of the non-executive directors and lead the efforts to replace the CEO with a vibrant, hard-charging, up-to-date current player in the tech industry, swap three or so current directors for such individuals as well, and protect the Red Hat acquisition from the IBM bureaucracy. Net… dramatic change is needed at the very top; it is well overdue!