History Is About to Repeat Itself At IBM

Even as it struggles in the short term, recent news should have IBM investors jumping for joy.

Jan 21, 2014 at 9:14PM

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.

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Fool contributor Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of IBM. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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