IBM's Way Out? Sell Itself!
I admit I was a little hurt when no one called about what IBM should do to end its painful five-year revenue journey. I offered a lot of suggestions. But the essence of the advice was to triple down on the technologies – cloud/analytics/AI – transforming business models and processes – and run from the old technology world IBM once ruled. I also suggested IBM go on a buying spree even beyond the technology sector. Well, the company’s parachute finally (half) opened. Modest year-over-year revenue growth was reported for Q4 2017 – and the gains were in the right areas (though for other reasons the stock actually fell when the report was released). All of my previous advice, especially about buying revenue (of the right kind), still holds, but now that revenue in the right areas has turned the corner, an interesting option has sharpened. The option has always been there, but because IBM appears to have turned a corner or two, the option is now very real and may offer the best path for its “survival.” But timing, as always, is critical.
While IBM was grinding to get back into the green revenue column, and when its emphasis remained on the right strategic areas, it perhaps unintentionally (or intentionally?) dressed itself up for an acquisition – its own acquisition. Of course, 4% revenue growth may be more than enough to convince beleaguered shareholders that the tide has turned, and IBM will crack $200 a share in no time! Is IBM really back? Yes, some “people-are-saying” it’s back on track. “It’s time to buy the stock now before it’s too late!” You know the pitch. Some are long, and some are short. But for different reasons.
But look at how many problems a sale solves! It solves the leadership problem, it solves the culture problem, it solves the legacy problem, it solves the organic revenue growth problem, and it solves the branding problem. IBM also gets to leave the world’s stage (the one it actually built in the 20th century) in one last blaze of glory (assuming it sells for a respectable premium).
On behalf of some prospective acquirers, let’s simulate some quick due diligence. IBM is moving in the right strategic technology directions, including blockchain, cryptocurrency, artificial intelligence, cloud computing, IOT and analytics. Revenue is increasing. Profitability is adequate. The ship is righted, at least for now.
As I’ve said here previously, transformation is never easy. Despite its slow-and-steady movement toward newer product and service offerings, IBM is still well-anchored in past business models and business units (which it still must jettison). IBM is revered as an elder, but not yet widely celebrated as an industry innovator, certainly not like Apple, Google, Facebook, Amazon or even Microsoft. An acquirer could extract the best of IBM and discard the worst.
In a strange – but good for IBM – sort of way, IBM’s valuation could be framed as “strategic” and not “operational.” This, of course, justifies big premiums – which is precisely why IBM’s last earnings report is so valuable to IBM’s shareholders. If IBM can successfully dress itself as a strategic catch, it can command a meaningful premium. If the lagging legacy business becomes a major part of the valuation equation, IBM shareholders will not like the valuation they receive from a prospective acquirer. Some advice? Proactively build-and-publish a diligence case predicated almost completely on forward strategic revenue. (It's obviously already out there, but how aggressively?)
Timing is challenging. As revenues and profits increase and IBM’s valuation increases, some of the old guards may keep acquirers at arms-length just to save the mothership. But in spite of the runway more revenue and profit creates, turnarounds are always tough – and vulnerable to market changes way beyond the control of the elders who love to amplify the “good news” that finally arrived after five years of wandering around the financial desert. Put another way, if a financial crisis occurs, valuations will fall across the board. Can anyone predict when the next financial meltdown will occur? Does anyone believe there will never be another financial meltdown? IBM should decide carefully. Timing is everything. Just ask Mark Cuban and Kevin O’Leary, two Sharks who sold their companies at the right time. Steve Case can also speak to us about timing. So can the executives at GeoCities, Netscape and MySpace. IBM should consider selling itself at the right time. Is now the time?
Two paths now. The first is to stay the slow-and-steady course toward transformation, which appears to have begun. The second is to dress the old warrior with some new weapons and test the market for attracting buyers. The “test” is simple: valuation premium. But IBM should select a path quickly. If revenue growth stalls, both paths will close. If the second path is selected, IBM should seek acquirers who will not only pay the highest premium but also integrate IBM’s strategic gold into the right competitive strategy. Who might that be? Apple appears on some lists. How about Microsoft? Or Amazon? Or even a private equity consortium? There’s also the proverbial break-up value of IBM. Since its business model is multiphrenic, large IT service providers like HCL, Accenture and Cap Gemini could buy the old parts of the business, while Apple, Microsoft or Amazon could buy IBM’s strategic initiatives.
Stay the course or sell? I think sell. It’s the best way out.
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