Here’s the Simple Reason Why I Think IBM Stock Is Dead Money

Stocks to sell

Ok, all you IBM (NYSE:IBM) fans, before you send me a nasty email telling me all the reasons why I’m wrong, consider that since Ginni Rometty became CEO on Oct. 25, 2011, IBM stock has lost 34% of its value. Meanwhile, the S&P 500 has gained 116%.

Almost seven years to the day IBM’s board appointed Rometty chief executive, the company announced its$34 billion acquisition of Red Hat, the largest open-source business deal ever.

“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” Rometty stated in IBM’s press release announcing the deal. “IBM will become the world’s #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”

If you own IBM stock you better hope she’s right because there are 34 billion reasons why this deal could come back to haunt shareholders.

I’ll be honest.

I’m very conflicted about IBM. While I’ve suggested on at least two occasions in the past that IBM stock is a value play worth owning — December 2016 and December 2017 — I also realize how much time has elapsed since IBM led the tech industry.   

While the Red Hat acquisition suggests IBM is fully committed to the cloud, given its track record in recent years I’m highly skeptical, that it can maximize Red Hat’s capabilities to lift the entire company.

For shareholder’s sake, I hope I’m wrong, but I don’t think I will be. Here’s why.

Ginny Rometty Overstays Her Welcome

On Jan. 1, Rometty will have been IBM CEO for seven years. According to an Equilar study, the median tenure for CEOs of large-cap companies in 2017 was 5.0 years, down from 6.0 years in 2013.

By that metric, Rometty’s overstayed her welcome.

However, to be fair to Rometty, the study of 504 large-cap CEOs found that 26% (131) had served for 10 or more years with 32 in the top job for 20 years or more.

Thus, one could argue that based on the 2017 average tenure of 7.2 years, she’s right on target and not overstaying her welcome.

The First Problem

I have two problems with this argument.

The first has to do with age. Rometty is 61. The traditional IBM retirement age for CEOs is 60. Rometty’s predecessor, Sam Palmisano, retired at 60, but she’s chosen to buck the tradition.

Are there no capable CEOs in the tech world to replace her? Of course, there are. 

In January, I suggested that Rometty become Executive Chairman leaving the day-to-day operations to a new leader, one that’s not afraid to make the tough decisions regarding IBM’s future.

Yes, it’s true, I also said that this new leader had to have the courage to bet the farm on the cloud, analytics, AI and blockchain. Rometty’s Red Hat deal would suggest she believes she’s the leader most capable of making those decisions.

There are some, however, who don’t see the Red Hat acquisition as a cloud play.

 Nigel Kersten, vice president of open source engineering at Puppet told ITPro recently:

“I find all the commentary claiming that this is IBM’s cloud play hilarious… I think it’s just ridiculous. I mean, Red Hat are clearly more relevant in that world than IBM, and there’s lots of really good stuff Red Hat are doing like OpenShift, Kubernetes – there’s a somewhat tenuous link there, but I wouldn’t put Red Hat in the same class as, say, Github for attracting the ‘new world order’, so to speak.”

While I’m sure a case can be made why Red Hat is a cloud company for every argument that it isn’t, the more significant point is that Rometty making this deal has given herself more time in the top job.

I mean, who’s going to push her aside with a $34 billion deal in the works? Talk about job security. Smart.

The Second Problem

This argument won’t take but a few words.

Here’s what I said about Rometty at the end of my January article:

“Ginni Rometty’s reign has been expensive for everyone but her. It’s time she sucks up her pride and moves into the Executive Chairman position and lets somebody else run with the football,” I wrote. “That, more than anything, will help cure what ails IBM stock.”

One $34 billion acquisition later, I don’t think anything’s changed.

IBM stock could revisit $200 but only with someone else in the CEO position.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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