IBM Corp.'s (NYSE:IBM) move to shed its chip-making unit, probably to Global Foundries, shows it is running out of easy ways to keep the shareholders satisfied.
IBM led the Dow higher yesterday on speculation that a deal could come this week and word that Gartner called it the leader in Security Information and Event Management.
But with the sale of its server unit to Lenovo pending, and the semiconductor unit apparently on the block, IBM is running out of areas to cut in order to maintain its stock price.
The easy things have been done.
There is no immediate threat to the dividend, which costs $1.11 billion each quarter to maintain. The outlay represented less than half of last quarter's $2.38 billion in profit. But its huge stock buyback program, authorized at $15 billion last fall, can't easily continue at that rate.
Here is why.
Under CEO Ginni Rometty, IBM has been steadily increasing debt, with $34.67 billion of long-term debt listed on its books as of the end of March, against $24.72 billion a year earlier. That's 28% of its assets, higher than even the troubled Hewlett-Packard (NYSE:HPQ).
The top line is also moving in the wrong direction.
IBM's 2013 revenues of $99.75 billion were barely on par with 2010's $99.87 billion, and revenues for the last four quarters ending in March are just $98.83 billion. Net income has been largely flat for four years, but the figure reported in March was almost $1 billion shy of what was reported a year earlier.
Like other large tech companies, IBM is continuing its move toward software, services, and the cloud, accompanied by happy press releases.
But HP is in the cloud, internationally. Microsoft (NASDAQ:MSFT) is bigger in the cloud. And there are other ways to analyze Big Data than Watson's proprietary technology.
IBM is known for taking a five-year view on technology, and while its annual "Five in Five" review touts many miracles, it gets increasingly hard for me to spot growing IBM revenue in the predictions.
IBM labs continue to churn out innovations, like chips built with carbon nanotubes, but it's selling the chip-making unit.
As a long-time tech reporter, I know that tech companies either grow or they die. IBM has failed to grow for some time, and in every niche it's entering today, it faces increased competition.
At some point, its mainframe business, the mainstay of its profits for decades, has to come under threat from the cloud. At that point, all the financial engineering in the world won't be able to hide the damage from shareholders.
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