There's nothing more difficult in business than a turnaround. You have to deal with so many more issues than in a start-up: legacy systems, employees that don't buy in, customers, however dwindling who are turned off by new ways.
But it can be done and I love seeing it happen. I am astonished by how Mark Tritton, CEO of Bed Bath & Beyond (BBBY) has navigated the turn from dowdy, sloppy almost e-commerce to one of the premier direct to consumer destinations that with a presentation so electric that you can't resist shopping there, especially if you are going back to college. The remodeled stores will blow you away. The doubters and myriad short sellers? Be prepared to be wrong. Mark's using math and magic to dazzle new and old shoppers alike.
There's another turn, though, that we saw last night that, while nascent, I believe will begin to get portfolio managers who are searching for some value in tech: IBM (IBM) .
Now many people have been worried about IBM ever since it took on a humongous amount of debt to buy a very uncharacteristic property: Red Hat. I had been a huge fan of Red Hat and its straight shooting CEO Jim Whitehurst, but there's not doubt about it, IBM paid a full price for the company, $34 billion. However, Red Hat was the premier on-boarder to the cloud and Whitehurst has consistent double digit growth.
IBM had emphasized digital, cognitive, AI, and lots of other buzzwords, but Red Hat gave the company a signature way of explaining its hybrid cloud strategy. The method of being able to help any company go to any cloud, including IBM's didn't stand out until the Red Hat purchase. Still, though, the growth stagnated.
That's where 31-year-IBM vet Arvind Krishna comes in. Arvind became CEO a little more than a year ago, inauspicious given raging COVID - and didn't skip a beat despite a momentary COVID related order slow down.
He vowed to spin off IBM's no-growth legacy information technology business and put resources behind the fast growers, which, at the same time would make IBM, long thought of as a hardware company, into one with almost 50% software, always thought of as a higher margin business that could expand IBM's lowly price-to-earnings multiple.
The strategy appears to be working. IBM's adding clients at a pace I have never seen before and getting some marquee names like Verizon (VZ) , Schlumberger (SLB) and CVS (CVS) making major commitments to the company. You may have seen the CVS relationship at work if you were one of the millions of people who called the company to ask about vaccines, something CVS alone was not prepared to handle.
These are big changes and with a balance sheet that scared some it looked like they were too big. But Arvind was a fiend about paying down debt and has already retired more than $18 billion since the Red Hat purchase.
He can do it because IBM generates an extraordinary amount of cash flow.
That's all well and good but what do the investors want? On the conference call last night, analysts were thrilled about seeing some revenue growth, a true upside surprise, but not thrilled at the gross margins, what is left after the sale of goods are made. Arvind patiently explained that when you have a decent hand as he has with the hybrid cloud you have to invest which will suppress margins now but bring profitable growth in the outyears.
Best of all, Arvind committed to the large dividend, one that yields 4.65%. I did fear that he would pull an ATT (T) and slash the dividend after committing to it.
Now neither Bed Bath nor IBM can turn around overnight. But they are well on their way. Wall Street won't give either their due until they put together a string of great quarters, that's how much damage has been done.
I am betting with, not against, both men. Too much good happening. Too little bad. That's how successful turnarounds start and I see exactly that with both IBM and Bed Bath & Beyond.