Prior to the lawsuit it filed against Groupon Inc (GRPN) earlier this month, International Business Machines Corp. (IBM) was widely viewed as a struggling company that was valiantly fighting to rekindle growth in a cloud-driven technology market, where ol’ “Big Blue” was in unfamiliar territory. However, the company’s recent actions indicate more than just a struggle for IBM stock.
Once IBM actually pulled the litigation trigger against struggling-just-to-stay-afloat Groupon on March 2nd, something became clear … IBM is getting desperate.
Unfortunately (for some), things are apt to get worse for International Business Machines before they get better again.
A fresh look back at some of the things plaguing IBM, when viewed through desperation-colored lenses, reveals to what degree the company and CEO Ginni Rometty just whiffed and why IBM stock may be a “pass” for the future.
This Is Not Your Father’s IBM Stock
Every company deserves a chance to protect its business-building inventions through the use of patents. On the other hand, there’s no denying patent litigation has become a business in and of itself, and serves as a legal form of harassment that can keep a company’s technology in limbo … not to mention bleed a defendant dry by forcing them to spend big on legal fees.
But International Business Machines is a technology company that actually uses its patents for their intended purpose — to prevent others from illegally using its novel creations?
Not quite.
Last year, IBM (for the 23rd year in a row) secured more U.S. patents than any other company, with 2015’s tally reaching a whopping 7,355. What does IBM need with all those patents? Good question. It’s pretty clear the company is not innovating all that much. A big part of the answer may simply be to hound other companies for licensing revenue, and deter newcomers from using such a technology.
Calling a spade a spade, that is what International Business Machines is doing with Groupon, citing the unauthorized use of four different patents that all relate to the way an individual and a website interact with one another.
The red flag: Two of the four patents were awarded in the mid-90’s when the internet was young and it wasn’t clear what it would ultimately become. The other two patents are newer, but are oddly overarching, arguably suggesting that no other company has the right to do business on the web. One of them refers to a website’s capacity to allow users to login using a third-party identity like a Facebook account.
It’s curious IBM would take aim at Groupon with that patent because most commercial sites now allow for third-party logins. So far though, International Business Machines is only going after smaller players … players it possibly thinks won’t avoid a fight the same way Twitter Inc (TWTR) did.
What IBM Should Have Been Doing Instead
So what? What does a string of patent battles have to do with the company’ future?
It’s a microcosm of a bigger picture. This nickel-and-dime litigation is a strong sign, and distraction from the fact, that the company just hasn’t come up with a creative, game-changing product in a long, long time, and is doing whatever it can to offset its failure.
There are three core problems holding the company back, however.
Although IBM Has Joined the Dance, It’s Well Behind in the Cloud Market.
Kudos to the company for acquiring Gravitant late last year, which will become IBM’s key hybrid software as a service cloud product. It’s a much-needed upgrade from the company’s private cloud focus and even its older hybrid cloud effort; it is the future of cloud computing.
Other players are already pretty well entrenched in this space, though, and International Business Machines isn’t winning enough cloud business to offset the decline of its server business.
An Acquisition Needs a Purpose and a Plan Before It’s Made.
Having an “if you can’t beat ’em, buy ’em” mentality isn’t bad in the business world, if you know what to do with an acquisition target once it’s in-house. However, International Business Machines appears to be using a scatter-shot approach. IBM is buying companies for their technology without any great ideas about how to use it nor people to turn it into a worthy product.
Sure, the purchase of Gravitant looks like it’s going somewhere. But, Gravitant seems to be the exception to the norm. IBM bought 13 existing, operational companies last year, ranging from healthcare analytics to consulting services to digital video management, yet the top line still slumped to the tune of nearly 12% in 2015. What is it doing (or not doing) with all these new deals? That one’s mostly on Rometty.
The Hodge-Podge Doesn’t Work Anymore.
Last but not least, as cliche as it has become to “split up a company in the name of unlocking value,” in IBM’s case it may well be the best next move if it continues to do a little of everything.
As of the latest tally, International Business Machines employs approximately 378,000 people spread out all across the world, operating seven categories of products (analytics, cloud, mobile, security, etc.) and offering a few hundred distinct products or services. Just due to sheer size and geography, it’s going to get messy and complicated. Now that mess and complication is getting in the way of efficiency.
It’s not clear what the ideal breakdown would look like, but it is clear a lack of focus is creating headaches and hurdles.
Bottom Line for IBM Stock
Don’t misread the message.
Even if the company doesn’t make any needed changes, IBM stock will still be around, one way or another, for years to come. Until such changes are made though — including a new CEO with a vision that everyone can embrace — IBM stock is apt to flounder.
The hard part is knowing that even once the overhaul begins, it could still take years for the company (or subsequent companies) to pull itself out of the rut.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
