It’s not good when even Warren Buffett loses patience with a company, but that’s what’s happened to IBM (NYSE:IBM) and IBM stock.
Although IBM stock was up 35% this year through July 24, including dividends, IBM has become the poster child for lack of innovation. No matter what it does to alter its course and get with the times, the investing public doesn’t regain faith in its leadership.
Investors’ lack of faith in IBM stock is clear because its five-year annualized return is -1.8%, significantly worse than the 13.7% total return for the Morningstar U.S. Market fund over the same period.
But even better evidence was provided by a comment on a recent Yahoo Finance article about IBM.
“IBM is Microsoft under (former MSFT CEO Steve) Ballmer. They need new leadership to reinvigorate the company’s culture and direction. Right now, it doesn’t matter who they buy or what they develop; the culture is one of stagnation vs. innovation,” wrote B, a Yahoo Finance reader.
Well, at least Ballmer’s NBA team, the Los Angeles Clippers, got Kawhi Leonard. All is forgiven, Steve.
But seriously, comments just like that one are very revealing. There is no love lost for IBM CEO Ginni Rometty.
I recommended that IBM move on from Rometty at the beginning of 2018. The company’s acquisition of Red Hat did little to change my mind. It’s never paid anywhere close to $34 billion for any of its acquisitions. The deal was a “Hail Mary” by Rometty. She’s a big part of the reason for the company’s stagnation, in my opinion.
But I digress.
Approximately 24 comments in, someone with the screen name Willie Fistergash suggested that IBM should merge with General Electric (NYSE:GE).
Maybe so, but it does have some merit. Here’s why.
Larry Culp’s a Better Bet
GE stock is another name I’ve had very little use for, but now that Larry Culp’s taken the helm, I’ve become a little more curious about GE stock.
After all, Culp ran Danaher (NYSE:DHR) for 14 years from May 2001 to March 2015 before taking some time off from being a CEO. During Culp’s 14-year reign at Danaher, the company’s stock gained 514% or nearly 20% on a compounded annual basis.
That’s pretty darn good. The owners of GE stock would obviously be quite pleased if he could repeat that performance.
I suppose it’s one reason GE’s board is willing to pay him up to $300 million, in an effort to boost GE stock
I recently wrote that the owners of GE stock should take profits — it’s up 44% in 2019 — rather than continue to hold their shares in the hope that Culp can reignite GE’s cash flow machine.
I was basing a good deal of my negative sentiment on the analysis of analyst Stephen Tusa, who was the first analyst to become bearish on GE stock back in May 2016 and continues to be skeptical about the company, despite all of the moves Culp has made to slim it down to a few healthy operating segments.
The $21-billion sale of GE’s biopharma business to Culp’s old company is a textbook example of a company using insider knowledge to extract premium dollars for a business that’s no longer useful to it.
What Does This Have to Do With IBM?
Larry Culp is 55 years old. Ginni Rometty is 61.
Larry Culp is a proven winner. Ginni Rometty has done nothing in her 7.5 years as IBM’s CEO to demonstrate that she has the technology chops or the leadership qualities necessary to reignite the company’s former penchant for innovation.
I’m not saying IBM hadn’t already lost its innovation spark before Rometty became CEO in January 2012, but she’s been at Big Blue for most of her career. If she was going to make IBM great again, she would have already done it.
The odds, however, of IBM and GE merging are extremely minuscule; I have a better chance of becoming the president of the United States, even though I was born in Canada and still live there.
But, for long-time shareholders or employees of IBM, the idea of someone like Larry Culp taking charge is an exciting one.
Unfortunately for IBM, Culp’s already got his hands full with his efforts to boost GE stock further.
Should IBM merge with GE?
It’s not the worst idea in the world.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.