Considering how IBM's (IBM) earnings, cash flows and stock price have trended since Ginni Rometty was named CEO at the start of 2012, it's understandable that Wall Street is hopeful a leadership change will yield better times for Big Blue.
However, if the history of corporate turnarounds has taught us anything, it's that turning around a ship as big as IBM usually isn't just about having the CEO make some smart technology and investment decisions. There need to be broader cultural changes in how both the company's C-suite and various divisions operate.
Since Rometty replaced Sam Palmisano as IBM's CEO a little over eight years ago, IBM's stock has delivered a dividend-adjusted total return of negative 4%. And the return would even be a little worse if IBM wasn't up over 4% on Friday (in spite of a 1.8% drop for the S&P 500) on news that Rometty is stepping down in April and will be replaced by Arvind Krishna, IBM's SVP of Cloud and Cognitive Software.
Over those eight years, the S&P 500 and Nasdaq have delivered total returns of 196% and 263%, respectively. And I don't think we even need to get started on what total returns look like over this time for many of IBM's large-cap tech peers.
In Palmisano's last year as CEO, IBM produced free cash flow (FCF) of $16.6 billion. And in Rometty's first year, FCF rose to an all-time high of $18.2 billion. But things have gone downhill since then: IBM's FCF totaled just $11.9 billion in both 2018 and 2019, and the company recently guided for 2020 FCF of about $12.5 billion.
The list of notable IBM stumbles since 2012 is too long to list in this article. But on a big picture level, here are a few major ones:
- IBM's massive software operations have grown more slowly than an enterprise software market that has seen healthy growth amid a secular shift towards cloud/SaaS offerings.
- IBM's also-massive IT services and outsourcing operations have struggled to grow, losing share to the likes of Accenture (ACN) and Infosys (INFY) .
- The adoption of Amazon Web Services (AWS), Microsoft Azure and other public cloud platforms has directly or indirectly weighed on numerous IBM hardware, software and services businesses. And though IBM spent $2 billion back in 2013 to buy web hosting and cloud infrastructure provider SoftLayer, it has remained a second-tier player in the cloud infrastructure space.
- IBM has made several dozen acquisitions during the Rometty era, and -- while it's possible that the recent, $34 billion, Red Hat acquisition works out -- the company has thus far failed to get a sufficient return for all of this spending, judging by how its sales and profits have trended for various businesses that the acquisitions were meant to strengthen.
Clearly, Krishna will have his hands full fixing all of this. IBM seems to be wagering that Krishna's technical background -- he has a PhD in electrical engineering, and is declared to have "built and led many of IBM's data-related businesses" -- will help him turn the tide.
In addition, though this hasn't gotten as much attention, IBM is betting that having Red Hat CEO Jim Whitehurst act as Krishna's right-hand man will help his cause -- Whitehurst will become IBM's President on the day that Krishna becomes CEO. Whitehurst had a pretty successful 12-year year as Red Hat's CEO, overseeing an eight-fold increase in revenue as well as the enterprise Linux leader's expansion into a slew of adjacent open-source markets (2018 interviews that I did with Whitehurst can be found here and here).
But to drive a major turnaround, Krishna and Whitehurst will probably need to do more than just make a few good decisions about things such as M&A and R&D and sales investments. They'll need to improve IBM's execution at a more granular level, and also make IBM a more appealing place for top-flight engineering talent.
Microsoft's (MSFT) turnaround during the Satya Nadella era is instructive here. Though they've gotten less attention than some of Nadella's high-profile strategic moves -- such as choosing to invest heavily in Azure, embrace open-source and acquire LinkedIn and GitHub -- a series of reorganizations that were carried out from 2013 (the year before Nadella became CEO) to 2018 also have much to do with the top and bottom-line success that Microsoft has seen over the last six years.
From all indications, these reorgs went a long way towards getting product and sales units to play nice with each other (a problem for Microsoft in the Steve Ballmer era). They also seem to have helped make Microsoft's business units more nimble when it comes to launching new products and improving existing ones, strengthened Microsoft's ability to commercialize its R&D innovations (this has historically been a problem for IBM) and helped make Microsoft a more popular place to work for tech engineers and execs.
Only time will tell whether Krishna and Whitehurst will prove willing and able to drive similar cultural changes at IBM. But even if they do, investors should keep in mind that such changes generally don't happen overnight.