Running head: IBM1

IBM2

IBM: A Falling Giant

Ian Emmons

Central Michigan University (BIS 101WI)

Abstract

This report and analysis gives a background of IBM as a company, outlining historical achievements and products as well as financial performance over the last century. A more recent snapshot of their performance in comparison with their modern competitors is given, showing a decline in their performance as a corporation since the Dotcom Boom of the 1990s. This decline is due to a number of factors but was reduced to account for four main factors: Financial Health, Growth, Innovation, and Market Valuation. In each of these categories, indicators and ratios are given in comparison with their competitors to evaluate the standing of IBM within a limited but substantial set of parameters. This will give an idea of what IBM needs to change to be able to compete in the future of the technology industry. Also, this will give some insight into what IBM is currently doing better than their competition and needs to keep doing to stay a prominent figure in the industries that they once dominated.

Table of Contents

Title Page………………………………………………………………………………………..1

Abstract………………………………………………………………………………………….2

Table of Contents………………………………………………………………………………..3

Introduction……………………………………………………………………………………...5

The Review of the Literature……………………………………………………………………5

History…………………………………………………………………………………..5

Notable Products and Achievements………………………………………….………...6

Current Products and Services…………………………………………………………..7

Competition……………………………………………………………………………..8

Methods and Procedures……………………………………………………………………….10

Discussion and Findings…………………………………………………………………….…10

Financial Health………………………………………………………………..………10

Figure 1………………………………………………………………………...11

Figure 2……………………………………………………………………...…12

Valuation…………………………………………………………………………….…12

Figure 3………………………………………………………………………...13

Figure 4………………………………………………………………………...14

Growth………………………………………………………………………………...14

Figure 5………………………………………………………………………..15

Figure 6………………………………………………………………………..16

Innovation……………………………………………………………………………..17

Figure 7………………………………………………………………………..17

Figure 8………………………………………………………………………..18

Meaning and Recommendations………………………………………………………19

Conclusion…………………………………………………………………………………......20

References……………………………………………………………………………………....21

IBM: A Falling Giant

Did you that the first commercially available hard disk drives were as large as the living room in your apartment? You have IBM to thank for most of technological advancements and luxuries available on the market today. From hard drives to personal computers to weapons calibration, IBM has been on the forefront of almost every new piece of technology in the past century. However, all of this has come to a grinding halt in the past 20 years, following the height of the Dotcom boom in the 1990s. Why? To examine this, the following report will analyze four key factors to a corporations financial success. These include Financial Health, Growth, Market Valuation, and Innovation. These factors will be analyzed using economic indicators and data from the stock market and company balance sheets. This analysis will compare IBM with its competitors to see where IBM needs to improve its financial standing to have any chance of truly being competitive again. After having been, arguably, the most successful technology corporation in history, IBM might not have the resources to compete with the tech giants of the new age.

The Review of the Literature

History

According to the Encyclopedia of Global Brands, International Business Machines Corporation (IBM), as a corporation, was founded on June 16, 1911 as the result of a merger between the Tabulating Machine Company, the International Time Recording Company, and the Computing Scale Company. Initially, this conglomeration was titled the Computing Tabulating Recording (CTR) Company, an amalgamation of the three companies’ former titles. This company had a very diverse product line that included everything from food-production machines to punched tabulating cards, which served as a forerunner to the more advanced computing machines in the decades to come. So that CTR could more accurately depict its expansive product line and ever-reaching global scope, the company formally changed its name to IBM in early 1924. Through the 1930s and into the 1940s, IBM dominated the typewriter market and laid the groundwork for future technological innovations that would soon make the typewriter obsolete. After having survived the economic turmoil of the 1930s and early 1940s, IBM introduced the world’s first large-scale calculating computer, the Automatic Sequence Control Calculator (ASCC), which is better known as Mark 1 (IBM b, 2013).

Notable Products and Achievements

As outlined in an article featured in The Atlantic written by Madrigal (2011), IBM has been on the forefront of almost every important technological change since their inception. As already mentioned, they created the world’s first electronic computation machine in 1944, the Mark 1. This alone would have changed the face of all aspects of technology thereafter, but IBM didn’t just stop there. Utilizing the Mark 1, IBM (in conjunction with Harvard University) changed warfare as we know it, using the Mark 1 to map and calculate weapons trajectories throughout the war, giving the USA and the Allied Forces a distinct advantage. Immediately after WWII, in 1946, IBM provided translation services to the entire world for the Nuremberg Trials, where surviving Nazi leaders were tried and convicted for their war crimes. Perhaps the most technologically important innovation came in 1956, when IBM debuted the first commercially available hard disk drive (HDD). While the HDD was the size of an entire room, it enabled companies and academic institutions to save computations for future use, changing the way business was conducted and research was accomplished forever. Adding to the success of the HDD invention, in 1971, IBM introduced the floppy disk drive which later evolved into the modern-day flash drive. This made information not only storable but portable, important for conducting business on a large and global scale. In 1981, IBM debuted the first commercially available personal computer, the Personal Computer 5150. While most of these previous inventions benefitted corporations and academic institutions the most, this showed a transition in the technology industry from producing for large-scale entities to the everyday consumer. The more noticeable accomplishments were of more of a ‘gimmicky’ variety, but still huge in the world of technology. In 1997, IBM Deep Blue defeated chess world champion Garry Kasparov, being the first computer to best a current world champion in a traditional game of chess. Most recently and perhaps the most popular, IBM pitted their new computing platform named Watson against a group of Jeopardy contestants on national television which ended in embarrassing defeats for all of the human contestants. This proved to the world what Watson and IBM were capable of and the national platform ensured everyone got a taste of the raw power of IBM’s computing systems (Madrigal 2011).

Current Products and Services

To get a current view of the plethora of products and services that IBM offers, it was best to consult the IBM web page for the most complete and current information. Upon looking at their web page, it was concluded that IBM does anything that can be done with computing or software. Starting with their Services section, IBM provides every technology that a business could possibly need. Their business consulting and technology services include (these are just the sections, not even all of the software embedded in them) Business Design, Process Design and Operations, Enterprise Applications, Network Services, Cloud Services, Business Resiliency Services, Technology Support Services, and Digital Workplace Services. Continuing into their Products, they split their Products into two sections: Technologies and Business. In the Technologies category, leaving out any redundancies with the Services section, they offer Analytics, Cloud Computing, Cognitive Computing and AI, IT infrastructure, IT management, Mobile Technology, Security, and Software Development. In the Business Needs section, there are added Business Operations Services, Collaboration Services, Commerce Services, Content Management Service, Finance Services, HR Services, and Marketing Services (IBM, 2018). Obviously, these are just the categories of services and products, so there a hundreds if not thousands of individual products and services offered. What one might notice is that none of these are for the individual consumer, but rather the large corporation or entity. This can be explained by the fact that, in 2005, IBM sold its personal computing division to Lenovo, marking its switch to a services and corporate based company that no longer sells directly to consumers (Madrigal 2011). To further illustrate the narrow customer segmentation that IBM covers, an article by Peterson of Business Insider (2018) that discusses IBM’s new blockchain technology and its customer base, at least four Fortune 500 companies are listed (Walmart, Visa, Nestle, and HSBC) as well as 25 companies in global trade, 14 companies in food tracking, and 14 companies in global payments (Peterson, 2018). This shows even further that IBM’s days of dealing with consumers directly are virtually over.

Competition

Finding competitors for competition can be daunting for IBM because they have a presence in so many different segments of the technology industry as a whole. To make this a simpler task, only two distinct segments of the technology industry will be represented: the cloud-computing market and the hardware market. In an article in the Financial Times, Richard Waters (2017) wrote about the competition that IBM was facing in the cloud-computing market. He identified Amazon, Microsoft, Google, Oracle, and Salesforce.com as IBM’s main competitors in the cloud-computing market, as well as others that were smaller and lesser-known (Waters, 2017). In another article about the cloud-computing industry, written in Forbes, Bob Evans (2017) also mentions that SAP is a main competitor in the cloud-computing arena as well (Evans). Transitioning over to the hardware marketplace, the competitors are almost too numerous to count. In an article written for the Tech Section of CNBC, Ari Levy (2018) outlines IBM’s most recent competition in the technology industry, naming many of IBM’s main competitors and more recently founded tech giants. In the hardware industry, IBM’s main competition is Apple, Alphabet (Google), Microsoft, Intel, and Nvidia. (Levy 2018). Obviously, many of these are crossovers with the cloud-computing industry. Given the nature of today’s tech industry, it’s not uncommon to see many companies that have vast reaches and product lines. So how exactly is IBM fairing financially in these industries? In the past, IBM had complete dominance, and was the largest contributor to the S&P 500 in the stock market from 1982 to 1986 (IBM b, 2013). However, starting in the mid-80s, companies began to copy the personal computer idea and join the tech marketplace to compete. These included Apple and Microsoft, the latter surpassing IBM in terms of market value in 1996 due to the fact that Dell and Compaq began running Microsoft Windows instead of IBM’s operating system (Madrigal, 2011). More recently, according to the Waters (2017) article, IBM is also lagging behind in the cloud-computing market, being outpaced by Amazon and Google. This caused Berkshire Hathaway and Warren Buffet to pull their investments and cut ties with the company in 2017 (Waters, 2017). Also, in the CNBC article by Levy (2017), IBM was the only major tech company who contracted in size in the past year (Levy, 2017). Obviously, IBM is still a tech giant who once dominated the industry, but its presence has been faltering since the Dotcom boom in the 1990s. Do they have the resources and outlook to compete into the future?

Methods and Procedures

To determine if IBM can survive the future of the technology industry, recent trends in company and stock market data are analyzed. Recent data from Bloomberg, IFI Claims Patent Services, and CNBC that has already been charted is analyzed in conjunction with data from StockRow, a financial data visualization and aggregator service, and Yahoo! Finance to determine trends across a predetermined set of categories. The categories that were chosen as good indicators of current and future performance were financial health, valuation, growth, and innovation. In each of these categories, an economic indicator was chosen (each indicator will be described in more detail in the Discussion and Findings section). For financial health, the indicators chosen were the net current assets and the debt-to-equity ratio. For valuation, the market capitalization was chosen as the sole indicator. For growth, the indicators chosen were revenue growth and EBIT. Finally for innovation, the number of patents issued in the last year and the research and development budget will be analyzed. These indicators were compared across IBM and four of its main competitors: Intel, Microsoft, Google, and Amazon (this provides a good mix of the hardware and cloud-driven companies). This will provide a good snapshot of current trends in the future and what IBM needs to change to remain relevant to the technology industry in the future.

Discussion and Findings

Financial Health

The first indicator that was analyzed was Net Current Assets. This is basically the difference between a company’s total assets and all of its current liabilities and debts. It is a good measure of short and medium term financial health as it represents how much it can expand its operations without having to resort to borrowing money.

Figure 1. Net asset value comparison. This illustrates the net asset value among IBM’s competition. (StockRow, 2018)

Obviously, IBM falls well below its competitors by this metric, as they currently have $ -57.9 billion dollars in current assets. This falls well below their competitors, although most of their competition has negative values as well. This shows that to further expand their operations, they have to raise more capital or borrow more money than their current competition.

The second indicator chosen as an indicator of financial health is the debt-to-equity ratio. This is a measure of a company’s current debt divided by the value shareholder equity. According to Investopedia (2015), “It is widely considered one of the most important corporate valuation metrics, because it highlights a company's dependence on borrowed funds and its ability to meet those financial obligations. Because debt is inherently risky, lenders and investors tend to favor businesses with lower D/E ratios,” (Investopedia, 2015). They go on to say that while it can vary by industry, the general consensus is that it should not exceed 2. To give an example, a D/E ratio of 2 means that two-thirds of a company’s financing comes from debt and the other third comes from shareholder equity.

Figure 2. Debt-Equity Ratio Comparison. Illustrates IBM’s D/E ratio vs. its competition.

Upon analyzing Figure 2, one can tell that IBM has taken on an unhealthy amount of debt, with a ratio of 2.66, almost double its nearest competitor. This means that it is at a higher risk of defaulting on its debt than its nearest competitors, even taking into consideration that IBM is an asset-heavy company. IBM is less attractive to investors in the future, making future growth more of a struggle in an industry where they are already lagging behind.

Valuation

Only one indicator was chosen for valuation, and that is market capitalization. Market Capitalization is the current stock price multiplied by the number of current outstanding shares of stock. It is one of the most important metrics used by investors, as it shows the ‘going price’ or current market value of the company if it was sold today. It indicates not only current value, but, if analyzed over time, can indicate possible future values as well.

Figure 3. Market Capitalization. Comparing IBM’s Market Cap. to competitors.

As can be seen in Figure 3, IBM has the lowest market capitalization out of any of its competitors. This makes IBM much less attractive to investors, stunting potential growth in the future. But its current value is not the only cause for concern. It is the only one of its competitors that has a downward trend over the last five years. In a technology industry that is growing at an enormous rate, this is certainly not the outlook that potential investors are looking for when they want to invest their money.

Figure 4. CNBC analysis. Comparing market cap performance in the tech industry (Levy, 2018).

These findings are corroborated in Figure 4 from CNBC. Out of the 10 biggest companies in the tech industry, including both cloud-computing and hardware corporation, IBM was the only company with a negative growth rate. The closest competitor is growing at a rate 28.9% faster than IBM.

Growth

Two metrics were chosen to illustrate the comparison of growth. These are Earnings Per Share Growth (EPSG) and revenue growth. These were chosen to give an idea of how revenue is generated per unit of equity (stock) and to just give a general idea of how much IBM is growing in the industry it used to dominate

The first metric is Earnings Per Share Growth. Earnings per share growth is the percentage of revenue growth generated for every dollar of new shareholder equity issued. This is important to investors because it shows that their money is being used to better the company and increase its future profitability.

Figure 5. EPSG across tech industry. A comparison of EPSG with IBM and competition (StockRow, 2018)

In Figure 5, it shown that IBM falls far below its competition and is the only one with a negative EPSG. This means that its revenue actually decreases as more money is brought into the company through investment. All of IBM’s competition is more profitable because of investment. This shows that money invested is not being used in a way that benefits the profitability of the company, scaring off future investors.

Revenue growth is used just to generally track a company’s performance and not analyzing it against any other factor but time. This gives a general idea of a company’s current health and, after looking at the trend, possibly predict its future health as well.

Figure 6. Revenue Growth. Comparison of IBM’s revenue growth vs. competition (StockRow, 2018)

As can be seen in Figure 6, once again, IBM falls far short of its competition over time. Over the last five years, IBM has had the consistently lowest revenue growth rates across its competitors. This is just further proof that IBM is not invulnerable and that its financial health is failing in this modern renaissance of technological advancement.

Innovation

To judge the innovation output and potential of each company, the indicators chosen were the research and development (R&D) budget of each company and the patent output of each company. This will give an idea of innovative each company is being and how efficient they are with the money they are allotted.

Figure 7. Top 20 R&D Spending. How IBM stacks up to their competition in R&D. (IFI 2018)

Obviously, looking at this chart, IBM doesn’t have the budget of its peers in R&D. In fact, according to MarketRealist, IBM only has a budget of $5.4 billion, which is $6.6 billion less than their nearest competitor, Microsoft. The company that used to be the beacon for innovation now has a budget of less than half of its competition. But that’s not really the metric that needs to be examined. The metric that needs to be examined is how innovative (in terms of patents awarded) they are being with that budget.

Figure 8. Patents Awarded 2017. IBM vs. Competition in innovation. (IFI, 2018)

Looking at Figure 8, this is obviously a place where IBM thrives. Looking back at the comparison to Microsoft, IBM was awarded almost four times as many patents as Microsoft with less than half the budget. To put it in more exact figures, IBM only spends $597,000 per patent whereas Microsoft spends $5.08 million per patent. This shows that IBM can innovate with a lot less, a fact that is very attractive to investors.

Meaning and Recommendations:

So, what does all of this mean? Looking at the financial health of IBM, you find a once prominent figure in the tech industry quickly becoming irrelevant. It has negative growth, less resources to work with than their competition, a lower value on the going market than their competition, and too much debt. All of these factors make IBM unattractive to investors, people who hold the money that IBM desperately needs. But there is a bright spot: IBM hasn’t forgotten how to innovate and they can do it for less money than anyone else on the market. So, how do they fix this? As mentioned before, IBM sold off their personal computing department over a decade ago, greatly limiting their market and customer segment and cutting off ties with the everyday consumer. To fix this, they should put their innovation to good use. IBM needs to start producing hardware and software for the average consumer again. They can do this for much less money than their competition and this would give them the influx of cash that they so desperately need. If they started doing this, their revenue growth rate would increase, making them much more attractive to investors, resulting in more investment and a larger market capitalization. By expanding their customer segment, they could eradicate most of the problems that have plagued them since the end of the Dotcom boom and since they stopped developing for the average consumer. To answer the question ‘Can IBM remain relevant and compete in the future of the technology industry?’: the answer is yes, as long as they use their innovative power to make it happen.

Conclusion

Throughout this analysis, a plethora of subjects surrounding IBM were discussed. A review of literature was produced to give a snapshot of the history and origins of IBM, their notable achievements and products of the 20th Century, their current product and service lines, and also to give an overview of their competition in the various industries that they are active in. The methods and procedures gave a brief overview of how the question ‘Can IBM remain relevant and compete in the future of the technology industry?’ The methods discussed how the research was going to be performed and how the financial data was to be analyzed in StockRow. The discussion section showed the analyses and explained what they meant. This was completed for various indicators in the categories of financial health, growth, valuation, and innovation. IBM only outperformed its competition in innovation, but it was explained how they could use that innovative power and expertise to compete long-term through opening up the customer segment that they provide products and services to.

References

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Bramante, J., Frank, R., & Dolan, J. (2010). IBM 2000 to 2010: Continuously transforming the corporation while delivering performance. Strategy & Leadership, 38(3), 35-43. doi:10.1108/10878571011042096

Evans, B. (2017, November 07). The Top 5 Cloud-Computing Vendors: #1 Microsoft, #2 Amazon, #3 IBM, #4 Salesforce, #5 SAP. Retrieved March 25, 2018, from https://www.forbes.com/sites/bobevans1/2017/11/07/the-top-5-cloud-computing-vendors-1-microsoft-2-amazon-3-ibm-4-salesforce-5-sap/#7c240e2d6f2e

IBM. (1015, September 21). About IBM. Retrieved March 25, 2018, from https://www.ibm.com/ibm/us/en/?lnk=fab

IBM b. (2013). In Encyclopedia of Global Brands (2nd ed., Vol. 1, pp. 523-527). Detroit: St. James Press. Retrieved from

http://link.galegroup.com.cmich.idm.oclc.org/apps/doc/CX2979600127/GVRL?u=lom_cmichu&sid=GVRL&xid=2ea02c8f

IFI CLAIMS Patent Services. (2018, January). Most innovative companies in the world in 2017 | Statistic. Retrieved March 23, 2018, from https://www.statista.com/statistics/227230/worlds-most-innovative-companies/

Investopedia. (2015, April 09). What is considered a good net debt-to-equity ratio? Retrieved March 24, 2018, from https://www.investopedia.com/ask/answers/040915/what-considered-good-net-debttoequity-ratio.asp

Investopedia b. (2018, January 17). How is a company’s stock price and market cap determined? Retrieved March 26, 2018, from https://www.investopedia.com/ask/answers/how-companys-stock-price-and-market-cap-determined/

Levy, A. (2018, January 23). IBM hasn't been this unimportant to the stock market in at least 40 years. Retrieved March 24, 2018, from https://www.cnbc.com/2018/01/22/ibm-hasnt-been-this-unimportant-to-the-market-in-at-least-40-years.html

Madrigal, A. C. (2011, June 16). IBM's First 100 Years: A Heavily Illustrated Timeline. Retrieved March 25, 2018, from https://www.theatlantic.com/technology/archive/2011/06/ibms-first-100-years-a-heavily-illustrated-timeline/240502/

Peterson, B. (2018, March 08). IBM told investors that it has over 400 blockchain clients - including Walmart, Visa, and Nestlé. Retrieved March 25, 2018, from http://www.businessinsider.com/ibm-blockchain-enterprise-customers-walmart-visa-nestl-2018-3

Shields, A. (n.d.). Why IBM Needs to Spend on Research and Development. Retrieved March 26, 2018, from https://marketrealist.com/2017/01/despite-patents-ibm-needs-spend-rd

StockRow. (2018, March). StockRow Financial Data Interactive Charter. Retrieved March 22, 2018, from https://stockrow.com/interactive_chart/d20c74ed-b10e-4a81-8ab3-7171fb722299

Waters, R. (2017, May 24). IBM is in a fight to keep up with big spending rivals in the cloud. Retrieved March 22, 2018, from https://www.ft.com/content/290e2936-4054-11e7-9d56-25f963e998b2