IBM (IBM, Financial) has a massive competitive advantage that no one is talking about.
Is it that it has such “sticky” earnings in so many legacy revenue streams while it builds out the next areas of their business?
Is it that it holds some of the most important patents in the world?
Is it that it has one of most recognized brands in the world, or because people say things like, “No one has ever been fired for using Big Blue”?
Could it be that it is one of the first “truly compelling” companies in the field of artificial intelligence, is one of the most capable companies attempting to monetize A.I. or has a pretty nice lead in both camps, in a business with a long runway?
Is it that it is well-positioned within several mega trends (by mega, I mean more than 50-year trends): cyber security (not going away, strong and growing position), artificial intelligence (not going away, super strong position), quantum chips (not going away, strong position), hybrid-cloud (not going away, strong position) and the Internet of Everything (not going away, strong initial presence)?
Is it that it has a long history and culture of reinvention and outstanding management?
Is it that is has a model that is focused on partnering and enhancing its enterprise customers’ results -- including some “would have been” competitors under different models (Apple, FB, etc.)?
Well, those are all certainly part of its advantage and niche. For the most part, however, those advantages are known and discussed.
But the undiscussed and massive competitive advantage that I am referring to is actually found in its owners.
Let me explain.
I work for a large company in the S&P 500. We are one of "America’s Great Companies," and we have some incredible brands.
We have many “tiny” shareholders and we have a few “large and silent” shareholders (Vanguard, BlackRock, etc.). However, the great company that I work for doesn’t have a large “supporting” owner. As such, we are extremely vulnerable to an activist who gains a 1% or 2% stake. A “minor” 1% stake in my employer could create a coalition strong enough to force change in the board of directors, management, model and structure.
For companies like mine, many decisions become shockingly shortsighted in this environment. Who wants to lose their multi-million dollar job in this economy? Not the CEO of my employer, nor any others.
As an entrepreneurial-minded and owner-minded employee, it is difficult to watch short-sighted decisions aimed squarely at showcasing profitability completely trump the conviction of sticking with vision, strategy and predetermined calculated tactics. More especially, it is difficult to watch when you believe in the company more than the company believes in itself.
By that I mean, if my company’s CEO were to boldly signal to the industry that it was going to accept lower profitability, without growth, for a few years while he builds out an extraordinary platform for the next 50 years, in this activist world, he would likely be out of a job by the sixth or seventh quarter when arbitrary analyst expectations are not met.
No matter how strong your competitive position is, it will disappear if you can’t support it fully by following through on your overall vision and doing so with the appropriate resources for an extended period of time. That is the position I find my company in today.
IBM has a good management team. The vision is clear to me. Just as importantly, IBM has good owners.
As IBM has attempted to redefine its value to the world yet again, things have been bumpy. To exasperate the bumpiness, the bell-banging Cramers of the world are out there yelling things like “sell, sell, sell” to the elevator-tip speculators on a weekly -- and sometimes daily -- basis.
But where are the 1% activists? Why haven’t the activists shown up, pushed for board change and watered down the vision to focus solely on this quarter?
IBM has been shielded from them to a major extent. IBM has not been forced to focus solely on this quarter’s profitability or growth. They are not abandoning their strategic approach to the market for the next 25 or 50 years just to get an earnings bump this quarter. Why? Because IBM has an owner with an approximately 8.8% stake in the company. That owner understands the vision and the potential of the company. He is realistic about the timetable. He likes the management team and their approach to creating long-term value.
Again, IBM has not been forced to focus solely on this quarter’s profitability or growth. Instead, it's been able to shed 70,000 workers in one area and hire 70,000 workers in another area, buy and integrate dozens of companies, invest billions in R&D and new transformative technology, create new divisions around strategic initiatives and imbed quality leaders.
Although the massive benefits of the transition haven’t shown up as quickly as I would like, IBM is making incredible progress. Admittedly, as an IBM investor, it seems like the transition has been executed in a painfully slow-motion pace. However, upon reflection, I realize that my original expectations were not nearly as conservative or realistic as I first thought. IBM’s accomplishments are significant. What they have done, in some respects, is nothing short of amazing. Eventually, the earnings will catch up.
Why do I think earnings will catch up? Because the management team at IBM has been given the time to get it right. Imagine competing on the GMAT, LSAT or ACT and you’re the only guy in the lecture hall given the advantage of extended testing time due to a lovely loophole in testing policies. Predictably, the advantage of extended time works significantly in your favor; you can contemplatively check your work twice and ensure that each problem has been given the effort to which it is entitled. Inevitably, your chances of success increase by a full bracket or two when compared to your peers.
I sincerely believe that IBM will get it right in time. It has a good vision with a good management team. It is at the forefront of numerous and widespread mega-trends. It has great cash flow to support its restructure. IBM’s management team is outstanding and it doesn’t have the pressure of making insane decisions to appease the Cramer Crowd or the 1% activist guys with unrealistic timelines. All of those items are a huge advantage. The final point mentioned, the longer leash, is rarely discussed but equally important to its advantage and the advantage of any company that has it.
Full disclosure: A huge percentage of my net worth is in IBM.
