IBM: A Storied Tech Firm Balancing a Turnaround Strategy and Growing Dividend
IBM incorporated in 1911 following the merger of three businesses. These firms built machinery ranging from commercial scales and industrial time recorders to tabulators that could count punch cards based on their hole patterns.
These diverse operations proved challenging to manage, so in 1914 the company brought in Thomas Watson Sr. as general manager.
Under Watson's leadership, IBM's engineering innovations turned the company into a global powerhouse. The firm moved from selling basic scales and clocks to developing accounting and calculating machines that could print alphabetic data and perform basic arithmetic.
This work set the stage for IBM's big breakthrough in the 1950s: the mainframe computer. These fridge-sized machines run mission-critical jobs, such as managing the databases of an insurance company or credit card transactions of a bank.
As mainframes became the standard for managing corporate data, IBM's leading product line and complementary hardware, software, and services made the firm a one-stop shop for corporate IT departments worldwide.
But IBM's success in mainframes nearly led to the company's extinction by the early 1990s. Focused on building ever more mainframes, IBM missed the personal computer revolution.
This transformed the way customers viewed, used, and bought technology, causing demand for mainframes to slow. IBM racked up multibillion-dollar losses and, in an uncharacteristic move, announced mass layoffs that harmed employee morale.
An argument could be made that IBM has never really recovered. Unlike in the past, IBM became a follower of the latest technological changes and has been caught up in cycles of cost-cutting plans and workforce reductions that have boosted the bottom line at the expense of its corporate culture.
More recently, the rise of cloud computing has pressured IBM. Vendors such as Amazon are in the business of providing computing infrastructure like a utility so companies don't need to maintain their own IT infrastructure. This means less hardware business for IBM and endangers its complementary software and support services over time.
To adapt, IBM has staked its future on the so-called hybrid cloud. The firm believes that many companies will keep some of their computing on their own servers while also migrating other programs to multiple cloud service providers such as AWS (Amazon) and Azure (Microsoft).
Red Hat, which IBM acquired for $34 billion in 2019, makes that work easier for software developers. IBM positioned Red Hat at the center of its growth strategy and surrounded it with the firm's own complimentary software and services, including artificial intelligence applications, middleware, security, and application modernization.
To further sharpen its focus on the hybrid cloud, in late 2021 IBM completed the spin off of its managed infrastructure services business, which accounted for around 25% of sales and helped improve clients' on-premises IT infrastructure, a business in secular decline.
The world's oldest technology firm has paid uninterrupted dividends since 1916. IBM's single A- credit rating adds further support for the dividend, but the company will eventually need to return to sustained revenue growth.
Given the firm's poor track record and the fiercely competitive nature of cloud infrastructure and services, it remains to be seen if IBM can revitalize its business.
These diverse operations proved challenging to manage, so in 1914 the company brought in Thomas Watson Sr. as general manager.
Under Watson's leadership, IBM's engineering innovations turned the company into a global powerhouse. The firm moved from selling basic scales and clocks to developing accounting and calculating machines that could print alphabetic data and perform basic arithmetic.
This work set the stage for IBM's big breakthrough in the 1950s: the mainframe computer. These fridge-sized machines run mission-critical jobs, such as managing the databases of an insurance company or credit card transactions of a bank.
As mainframes became the standard for managing corporate data, IBM's leading product line and complementary hardware, software, and services made the firm a one-stop shop for corporate IT departments worldwide.
But IBM's success in mainframes nearly led to the company's extinction by the early 1990s. Focused on building ever more mainframes, IBM missed the personal computer revolution.
This transformed the way customers viewed, used, and bought technology, causing demand for mainframes to slow. IBM racked up multibillion-dollar losses and, in an uncharacteristic move, announced mass layoffs that harmed employee morale.
An argument could be made that IBM has never really recovered. Unlike in the past, IBM became a follower of the latest technological changes and has been caught up in cycles of cost-cutting plans and workforce reductions that have boosted the bottom line at the expense of its corporate culture.
More recently, the rise of cloud computing has pressured IBM. Vendors such as Amazon are in the business of providing computing infrastructure like a utility so companies don't need to maintain their own IT infrastructure. This means less hardware business for IBM and endangers its complementary software and support services over time.
To adapt, IBM has staked its future on the so-called hybrid cloud. The firm believes that many companies will keep some of their computing on their own servers while also migrating other programs to multiple cloud service providers such as AWS (Amazon) and Azure (Microsoft).
Red Hat, which IBM acquired for $34 billion in 2019, makes that work easier for software developers. IBM positioned Red Hat at the center of its growth strategy and surrounded it with the firm's own complimentary software and services, including artificial intelligence applications, middleware, security, and application modernization.
To further sharpen its focus on the hybrid cloud, in late 2021 IBM completed the spin off of its managed infrastructure services business, which accounted for around 25% of sales and helped improve clients' on-premises IT infrastructure, a business in secular decline.
The world's oldest technology firm has paid uninterrupted dividends since 1916. IBM's single A- credit rating adds further support for the dividend, but the company will eventually need to return to sustained revenue growth.
Given the firm's poor track record and the fiercely competitive nature of cloud infrastructure and services, it remains to be seen if IBM can revitalize its business.
