History Is About to Repeat Itself At IBM

IBM (NYSE: IBM  ) is facing a crisis of sorts: It simply can't find new ways to continue to grow its IT empire. As a story line that's been under way for the better part of two years, this is by no means new news for IBM. However, it does highlight perhaps the most acute problem facing Big Blue. IBM will need to act decisively to tackle its sagging top line to retain investors' confidence. The sooner, the better, too.

Now an attempt to exit one of its least-attractive businesses -- servers -- appears to be well under way. And while this move makes plenty of business sense for IBM in the short term, it also underscores why IBM remains one of the best bets for conservative, long-term investors as well.

Out with the old, in with the new
As widely reported by the business press, IBM appears to be in advanced negotiations with Chinese IT power Lenovo over a possible sale of its server business.

Although IBM doesn't specifically break out the figures for its server business, it's widely cited as one of the company's lowest-margin business units. Worse yet, the market for x86 servers has also slowed in recent years, as cloud computing has made it substantially less crucial for technology companies to invest in their own servers. 

Divesting its server business would come with the twofold benefit of exiting a relatively unattractive business and providing fresh capital for investment in areas where IBM sees greater opportunity -- such as cloud computing services.

It's worth nothing that Lenovo isn't the only one interested in IBM's server business. The now privately held Dell has also been thinking about jumping in. For Dell, a deal could yield greater economies of scale, as it's currently the second largest player in the x86 server market.

History repeats itself
In a similar story line, IBM sold its PC business to Lenovo back in 2005, largely for the same reasons: The increasingly commoditized nature of the PC business no longer proved attractive for IBM. The deal has since proved to be a resounding win for both parties.

Lenovo has successfully been able to leverage its low-cost manufacturing expertise, along with the computing boom in emerging markets, to grow to become the world's largest PC maker. The move also helped IBM push into higher-margin businesses, such as software and services.

Why I love this move for IBM
As I mentioned, this storyline is perhaps most important because it underscores IBM's beautiful ability to re-create itself over time. To me, this speaks to one of the most important, but easily overlooked, reasons to own IBM -- its management.

At well over 100 years old, IBM has seen the coming and going of more technological paradigms than virtually any living soul can. Yet IBM has succeeded where so many established companies ultimately fail. It's navigated those periodic sea changes and found new ways to remain relevant.

The 2005 sale was a perfect example of IBM's ability to execute this playbook to extraordinary effect. IBM was instrumental in developing the PC market it then sought to exit, even though its PC business was still profitable. But then-CEO Sam Palmisano saw that to keep growing profits, IBM needed to continually push toward higher-margin businesses as technologies evolved. It's this push into more lucrative areas, as well as other savvy management moves, that have helped IBM nearly double the stock market's return since its Lenovo sale in '05.

The short-term view for IBM doesn't look pretty. However, for those looking to own shares in a company for years to come -- to actually invest -- news of IBM's possible server sale should be seen as a case of sticking to its roots. As it has shown time and again in the past, IBM always finds a way to overcome its struggles eventually, and we're seeing that story slowly play out again today.

I trust IBM and its management to make the right decisions over time, and if shares drop following its earnings report, that'll be just another opportunity to buy shares in a business that's built to last on the cheap.

Investors would do well to keep that in mind.

A better bet than IBM for the year ahead
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2803627, ~/Articles/ArticleHandler.aspx, 9/1/2015 3:55:49 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Andrew Tonner

Andrew Tonner is a tech specialist for The Motley Fool. He is a graduate of The University of Arizona with a degree in Finance.

Today's Market

updated 6 hours ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:02 PM
IBM $147.89 Down -0.09 -0.06%
International Busi… CAPS Rating: ****