Is IBM Doomed?

So now tech is the enemy? Apparently. The Wall Street Journal is reporting that IBM (NYSE: IBM  ) plans to cut 5,000 U.S. jobs and ship "many" of them to India. How many is unclear, and Big Blue isn't saying.

Didn't you just say ...
Color me confused. In January, IBM reported a 17% per-share fourth-quarter earnings boost and told analysts to expect $9.20 a share in 2009 net income, well ahead of the Street's $8.75 per share forecast. Big Blue was the Big Blue Dog. No longer.

Or maybe it still is. Amid the speculation, I sense two possibilities. Either IBM desperately needs to cut costs and is turning overseas for relief (a problem), or Big Blue is preparing to buy Sun Microsystems (Nasdaq: JAVA  ) by giving itself a little fiscal breathing room (an opportunity).

It's a problem!
Lower tech spending argues in favor of the problem theory. How low will it go? According to Duke University's quarterly survey of 543 chief financial officers serving at U.S. companies, tech spending will dip 6% this year.

No need to tell Oracle (Nasdaq: ORCL  ) that. IBM's database software peer tacitly copped to lower tech spending -- and, thereby, lower growth -- when it agreed to pay a dividend for the first time in its history.

A weakening economy argues for a lower cost structure. Outsourcing to emerging countries lowers costs. And not just to India; IBM has services operations in several emerging nations, including Brazil and The Philippines.

But it's India that's home to professional services giants Infosys (Nasdaq: INFY  ) and Wipro (NYSE: WIT  ) . Moreover, rumors persist that IBM would bid not only for Sun, but also for ailing Satyam Computer Services (NYSE: SAY  ) , further boosting its presence on the subcontinent.

It's a Big Blue Presence. In 2006, IBM committed to spend $6 billion to build a mammoth services operation on the subcontinent. Two years later, that group was still doubling its Indian client base.

When times are tough, you go where success takes you. For Big Blue, that's India.

It's an opportunity!
The trouble with the previous theory is that it assumes the cuts are abnormal. They may not be. In January, IBM laid off staff in the US. A spokesperson said at the time that company policy is to continuously evaluate its mix of skills and resources and adjust as needed.

Translation: We'll do this as often as we need to in order to be competitive.

Not surprisingly, that sentiment jibes with what IBM chief executive Sam Palmisano wrote in this year's letter to shareholders. "We will not simply ride out the storm," Palmisano said. "Rather we will take a long-term view, and go on offense." Here, 'offense' could very well refer to cost cuts designed to keep pace both with Indian peers and domestic rival Hewlett-Packard (NYSE: HPQ  ) .

If so ... good.

Professional services bring in high-margin, predictable revenue. Thus, having a backlog of contracts and a schedule of guaranteed payments helps to smooth the often volatile business of selling servers and other hardware. Palmisano should do whatever he must to protect his company's sacred cash cow.

Then there is the possibility of a bid for Sun. Reuters quotes a source that says talks between the two firms could continue into next week. Assuming an agreement is reached, IBM would likely spend at least $8 billion -- or $6.6 billion if you net out the $1.4 billion in excess cash and investments on Sun's balance sheet -- to close the transaction.

That's real money. Were Palmisano serious about a deal, he'd probably also be serious about conserving as much cash as possible to pay severance, combine operations, and invest in areas of common interest. Open source software, for example.

Lies, damn lies, and one statistic that matters
Finally, let's turn to history. A check of Briefing.com shows that IBM has exceeded earnings guidance in each of the past 5 quarters and 8 of the last 10. In none of those periods did Big Blue fall below the Street consensus. Would layoffs derail this trend? I can't see how.

Tech isn't the enemy, Fools. Rumors are.

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Tim is a member of the market-beating Rule Breakers team and owned shares of IBM and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy likes "Tusk" but still prefers Fleetwood Mac's classic "Rumours" album.


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  • Report this Comment On March 26, 2009, at 9:48 PM, faclark wrote:

    Tim, from an investors perspective, yes it is a good thing that IBM is focused on keeping costs as low as possible. But from every other perspective, this is not a good development. First, this only further exacerbates the worst recession in the last 50 years but throwing more US workers onto the unemplyment line. They now cost tax dollars to support. Also, from a customer perspective, US accounts are going to see their service suffer significantly. In the long run, this will only result in less satisfied customers in the US. Lastly, IBM has it's hand out to the governement for stimulus dollars for anything from smart grids, medical records and infrastructure. This news will not sit well with the US public, with congress or with the President - who wants to hand over tax dollars to a company that is shipping jobs to other countries ?

  • Report this Comment On March 27, 2009, at 1:33 AM, Jasons675 wrote:

    Yea 5000 more american jobs going to India. Nice job handing out the handing out the tax Stimulis money and TARP (Troubled Asset Relief Program) funds to companies that give huge bonus to CEO's then they lay off 5000 US jobs to outsource to India. Then you also have companies like AT&T also both outsource us jobs to india, singiapore and Manila and insource Indians to the US on H1B Visas and Student Visas most of whom dont speak good english and/or have 3rd grade grammer skills to communicate issues with american companies to groom customers when all the jobs go over seas. At least when I call time warner cable in New York the customer service department is in the US, even though they have southern accents or hire workers from the inner citys, I would rather speak them them any day of the week instead of some Indian in bangalador with a fake masters whom I can not communicate with!

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