Tickers mentioned: AMZN, FDS, GOOG, IBM, INFO, MSCI, MSFT, ORCL, SSNC, VRSK
Late to the Cloud and Little Appetite for Acquisitions
IBM named Arvind Krishna to replace Ginni Rometty as CEO effective April 6th, 2020. Some 7-8 years ago IBM accelerated its transition to the cloud. This transition was accompanies by a change to pro rata revenue recognition which typically means declining revenue during the transition period. Outgoing CEO Ginni Rometty did not give investors anything in return to offset 27 quarters of declining revenues over an eight year period.
We first advocated a systematic M&A program in 2015 to remedy IBM’s declining revenue problem and to strengthen the company’s industry vertical competitive positioning. The M&A effort would focus on Technology companies with a strong vertical market position. Examples of such companies include FactSet, IHS Markit (IHS at the time), MSCI, Solera Holdings, SS&C Technologies and Verisk to name a few.
We Like Blockchain
IBM has partially hung its hat on Blockchain. We are bullish on Blockchain. Look no further than Coinbase which generates $1 billion+ of revenue operating its digital currency exchange. Expect more such exchanges and digital currency custody houses. IBM was early to Blockchain and can use it as a differentiating technology within its Financial Services practice and across other end markets.
We Don’t Like IBM’s Chances in Cloud/Cognitive Computing
Cloud/cognitive computing is the other hat hook. We are not bullish on IBM’s cloud efforts insofar as direct competition against AWS, Azure and GCP. IBM was late to the Cloud game and lacks the balance sheet to compete against the three aforementioned platform players. The Red Hat acquisition does not place IBM in the same league as AWS, Azure nor GCP and we believe IBM overpaid for the company. A combination with Oracle (ORCL) to further the cloud effort isn’t worth the disruption that likely would be caused by clashing cultures. We prefer that IBM pursue an acquisition-driven buildout of two or three key industry verticals using an M&A landscape that would include the previously mentioned companies as well as others.
New CEO Arvind Krishna – A Brief Bio
Prior to being named CEO, Arvind Krishna’s responsibilities included IBM Research, IBM Cloud, and IBM’s Security and Cognitive Applications businesses. Krishna drove IBM’s acquisition of Red Hat.