The million-dollar question for IBM market observers? Did Big Blue — in promoting 30-year insider Arvind Krishna on Thursday night to replace long-time CEO Ginni Rometty in early April — just have its Microsoft Satya Nadella moment?
“I wouldn’t be surprised if [IBM] is looking at Microsoft and hoping the same thing happens here,” said Sevens Report Research founder Tom Essaye on Yahoo Finance’s The First Trade.
Mostly everyone by now knows the Nadella folk story at Microsoft.
Microsoft promoted Nadella to CEO in 2014, taking over for the always charismatic Steve Ballmer. Nadella joined Microsoft in 1992 and rose the ranks on the technical side of the business. Before assuming the CEO role, Nadella was instrumental in pivoting Microsoft to the cloud.
In Nadella, Microsoft got a CEO with real technical chops that could pivot the company to the future of computing and work. That was different from the salesman like skills of Ballmer, which garnered mixed results in terms of stock and financial performance.
Since Nadella took over, Microsoft’s stock has surged more than 300%. The company’s market cap is a staggering $1.3 billion. Nadella has used his technical skills to accelerate Microsoft’s shift to cloud and enter into new businesses such as LinkedIn (which he led Microsoft in acquiring). Above all else, most experts would agree Nadella has completely transformed Microsoft’s culture to one focused on speed and execution.
To Essaye’s point, IBM is probably hoping to catch Nadella-like magic in the battle with Krishna. Indeed the resumés are very similar.
Krishna joined IBM in 1990 and has a strong technical and product background. Rometty’s background is more on the consulting and sales side — she is also well-known for her global Rolodex of high-profile contacts. Most recently, Krishna held the title of IBM senior vice president for cloud and cognitive software — a key business for IBM’s future. Krishna is seen as one of the architects of IBM’s $34 billion acquisition of cloud play Red Hat.
Regaining investor confidence
To be sure, just like Nadella Krishna takes over a tech giant that is not without challenges. First and foremost, IBM has to regain the confidence of Wall Street after years of subpar sales and profits under Rometty. While Rometty has gotten high marks for efforts on diversity and keeping the IBM name constantly in the media, her tenure will likely be remembered as failing to move swiftly to adapt IBM to new technologies (see cloud) and make the company more nimble through deeper restructuring efforts.
In turn, that has weighed on IBM’s stock. IBM shares are down about 24% since Rometty was announced as CEO on Oct. 25, 2011, per Yahoo Finance Premium data. Institutional investors have stayed away, too. The top three IBM shareholders — Vanguard, BlackRock and State Street — own a collective 21% of IBM’s stock, according to Bloomberg data. After that, shareholder ownership is much more widely dispersed in smaller increments.
Meantime, research on IBM at Goldman Sachs is coverage suspended. All of this is pretty unusual for a big cap tech stock with a 4%-plus dividend yield and massive cash flow generation.
Wall Street will of course give Krishna time to develop his near-term and long-term strategies for IBM. At the moment, the mood on the Street is that of cautious optimism.
“We do see a longer term opportunity for value creation and note IBM has one of the lowest active institutional ownership levels across large cap tech, based on Morgan Stanley's proprietary Risk Reward data,” points out Morgan Stanley analyst Katy Huberty.
Huberty adds, “We see the opportunity to 1) engage with investors more regularly, including holding the CEO accountable to the company's strategy and execution on quarterly earnings calls, 2) reconsider IBM's product/services portfolio to identify more transformative divestitures (declining and low-profitability segments), 3) make more structural changes to the cost structure like ensuring accountability for commercializing R&D, and 4) better leverage Red Hat's partner ecosystem, especially with public cloud and SaaS providers where IBM under-indexes relative to Services peers.”
A large to-do list for Krishna. But if Nadella could pull off miracles at Microsoft, why not Krishna at IBM?
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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