Last week turned out to be quite intense for IBM. First came the news of its email migration project gone wrong and then Jim Whitehurst stepping down from his role as the President. Both this news caused enough and more stir on the street, and as expected, the stock dipped nearly 7% to USD 139.58 during trading hours on Friday, 2nd July.
But does this meltdown spell bad news? We at Greyhound Research think otherwise. Here are five key reasons why we believe so.
1/ IBM stock has recovered well over the past six months, but a lot more needs to be done.
After the company announced the separation of its traditional services business (now called Kyndryl) from its modern hybrid cloud business, its share price has made a decent recovery. To offer context, from USD 106.65 at the end of October 2020, the stock price hit a high of USD 151.28 in June 2021.
At Greyhound Research, we believe this recovery shows that this change in structure has been well received by institutional and retail investors alike. But, of course, any change of this nature will have a painful period of separation and realignment that will include changes to the company structure, products/service lines, teams, and employees and hence fluctuations in stock price. For a company as large as IBM, this period can be more extended than usual and take anywhere between 18-24 months for the operations to stabilise fully.
Having said that, what makes this change a lot more painful for IBM is the long-drawn transformation that it set on years ago under the leadership of then CEO Ginni Rometty.
The fact that stock prices today are back to early 2011 levels is something that IBM management needs to work upon and do a lot more to rebuild confidence.Tweet
2/ The email outage was likely a first, but a project of this nature needed better managing.
First things first, while Lotus Dominos (now called Verse) is not the slickest product and scores low on the overall user interface, it is still one of the most secure products in its category, and many companies still swear by it.
This is probably the first time in IBM’s history (as far as we know) that their email has suffered an outage.Tweet
We at Greyhound Research believe while the company’s reasons for the migration is well-placed – to ensure data residency in the US and control and move away from its new owner, HCL Technologies – any engagement of this nature and scale (approximately 350,000 mailboxes) needed better managing.
Having said that, one would expect IBM to have the expertise and dedicate the funds required to ensure a near-seamless migration despite the scale and complexity involved. Still, then as its second nature to most technology projects, failures are a given. Especially so when there’s enough and more dependency on a partner. In this case, the code development and development and management are now entirely in control of HCL. Since either party has said not much, one can never rule out the failure from either side or even both.
3/ Jim Whitehurst was a star addition to the galaxy called IBM that eventually broke away.
Now coming to the other issue of the suddenness with which Jim Whitehurst decided to leave the company. This has been a dampener, and the timing couldn’t be worse since the company was already facing bad press on account of the issues with its email migration project.
At Greyhound Research, we believe that since Jim’s news comes exactly two years after the company announced the completion of the acquisition (9th July 2019), the decision to move on may not be that sudden after all. But, of course, as it’s the case with most such changes, the announcement to the public is only made at the last moment.
Having said that, what’s important to consider is that Jim will continue in a consulting role and work closely with Arvind Krishna. This, if anything, should add layers of hope for the employees, investors and most importantly, the clients. However, one does need to stop, pause, and ask whether these stakeholders depend as much on a single executive. Yes, it’s expected in a smaller outfit but not in a blue-chip company like IBM. Lest we forget, at companies like IBM, there are enough and more seasoned hands at the mid-management layer, which is enough to instil confidence with stakeholders. Also, critical to note is that Arvind Krishna, the real brainchild behind this acquisition, continues to soldier on.
One must expect similar resignations from IBM and Red Hat sooner than later. Fact is, after any such acquisition, exits do happen.Tweet
4/ Red Hat, after all, is an IBM company and tighter integration is not a matter of choice.
Over the past few years, those who have dealt with these companies can confirm that they both maintained an arm’s length distance. That was the promise they made to their clients and partners.
For the uninitiated, Red Hat works closely with most of IBM competition and the arm’s length was deeply appreciated by them.Tweet
We at Greyhound Research believe, while this arrangement worked well in the past, it can no more continue in the same fashion. What is critical here to consider is that IBM’s roadmap and revenue lines will change here on, and Red Hat is core to this. Hence, tighter integration is not a matter of choice. Especially after IBM paid the premium that it did for the company. It may help to know that IBM manages a large base of clients for both SAP and VMware, and customers are eagerly looking to explore ways to host the former on the latter. However, the additional prices for VM instances sometimes make it prohibitive to host SAP, and this is where Red Hat is expected to offer value. Of course, there are many more use-cases where Red Hat adds excellent value to IBM.
Having said that, one must also face the truth that while the Red Hat team is great at engineering, there are significant gaps on the business side. Fact is, at the time of acquisition, in FY 2019, Red Hat was making only USD 3.4 billion, and its services business remained largely untapped. This is where IBM lends the actual muscle and can help increase monetisation multiple times. But, of course, as it’s the case with any such change, the old hatters don’t always agree and hence leave.
5/ But these changes won’t land results till IBM continues to hold onto legacy mindsets.
For those tracking the company, this shouldn’t come as a surprise. Clients, partners, and most other stakeholder types have faced the legacy mindset in pockets across the company. Of course, one need not take anyone’s word on it, and a simple google search is enough to confirm instances where the legacy mindset is apparent.
At Greyhound Research, we believe, while IBM has its strengths and has made some spectacular changes, what it hasn’t done with equal gusto is to modernise the culture across the company.Tweet
The fact is traditional ways of doing business are well engrained in a company of this size and scale, and it’s not a surprise to see legacy approaches being practised and carried forward. However, barring the product team, which has seen many impressive additions, this legacy mindset impacts primarily how the company sells and communicates with its stakeholders. In today’s day and age, where start-ups are quick to respond to market developments, to be tight-lipped and largely reactive is not how one can expect to win confidence.
Having said that, not all is lost for IBM, as many often lament on social media. There are great examples of how the company supports some of the world’s largest banks and other highly regulated industries. In addition, the company’s investments in AI/ML, Data Science, Blockchain, Quantum Computing and many other areas are great examples of its commitments to technology. So no, they aren’t all that of a dinosaur. But yes, change is harder to institutionalise in such large companies, especially those open to public scrutiny QoQ.
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