Congratulations to IBM for Surviving 100 Years

Jun.20.11 | About: International Business (IBM)
IBM Stock Returns vs. Dow Jones Industrial Average, 1968-1985 (click to enlarge)

IBM is celebrating the 100th anniversary of its founding on June 16, 1911. See a timeline here of "milestone events in one of the quintessential U.S. corporate success stories." It would be impressive enough for any U.S. company to still be profitable and successful even a decade or two after it started, but it's truly rare and extraordinary for a company to be around for an entire century like IBM, and survive two world wars, 20 recessions including the Great Depression, strong "gales of Schumpeterian creative destruction" and still be one of the largest and most successful companies in the world 100 years later.
As Steven Pearlstein wrote in today's Washington Post:

IBM, almost uniquely among technology companies, has managed to survive a series of technological sea changes and make it to its 100th anniversary, which was celebrated last week in New York. Since 1911, as the world has progressed from the calculator and typewriter to the mainframe to the personal computer and now to the Internet, this corporate centurion remains at the top of its game and near the top of the technology heap."

Successful companies like IBM (or Alcoa and Microsoft) that survive over many generations do so because of their extreme focus on innovation, bringing new products to the market, cost-cutting, productive efficiency, and engaging in super-competitive behavior. Even when they inevitably capture a large market share and become industry leaders, companies like IBM, Alcoa (NYSE:AA) and Microsoft (NASDAQ:MSFT) still face extreme market discipline, both from existing firms and from the potential threat of new competitors who stand ready to enter the market and challenge the market leader under the right market conditions.

And to make it to its 100th anniversary, IBM not only had to survive intense market competition and "technological sea changes," but it also had to survive several antitrust cases brought by the U.S. government (like Alcoa and Microsoft), including one that lasted for more than a decade. From Wikipedia:

"IBM's dominant market share in the mid-1960s led to antitrust inquiries by the U.S. Department of Justice, which filed a complaint for the case U.S. v. IBM in the United States District Court on January 17, 1969. The suit alleged that IBM violated the Section 2 of the Sherman Act by monopolizing or attempting to monopolize the general purpose electronic digital computer system market, specifically computers designed primarily for business. The case dragged out for 13 years, turning into a resource-sapping war of attrition. In 1982, the Justice Department finally concluded that the case was “without merit” and dropped it. But having to operate under the pall of antitrust litigation significantly impacted IBM's business decisions and operations during all of the 1970s and a good portion of the 1980s.

The chart above shows the history of IBM stock returns compared to the Dow Jones Industrial Industrial Average (DJIA) from 1968 to 1985. Perhaps this is a case of correlation and not causation, but during the entire time that IBM was being sued by the Department of Justice for exercising monopoly power, the return on IBM was about the same as for the entire DJIA. But as soon as the case was dropped, and IBM no longer had to divert resources to defend itself from government prosecution, the return on IBM stock rebounded. In the three years following the end of the government's lawsuit, IBM shares increased by 120%, or more than twice the 50% return on the DJIA during that period.

Of course by the 1980s the computer industry was going through a major "technological sea change" and moving from mainframe computers to personal computers, and the potential threat of competition from young upstarts like Microsoft (founded 1975), Apple (NASDAQ:AAPL) (founded 1976), Sun (founded in 1982), Cisco (NASDAQ:CSCO) (founded 1984) and Dell (NASDAQ:DELL) (founded 1984) was becoming a reality and providing IBM with so much market competition that the government's monopoly case against IBM was becoming irrelevant.

One of the lessons from IBM's 100 anniversary is that intense market competition is the best and most effective regulator possible, making vigorous enforcement of antitrust laws unnecessary. In the 13-year period from 1969-1982 that the government was harassing IBM, the twin forces of "technological sea changes" and market competition were much more successful and effective at challenging IBM's market dominance than the government's prosecution. And we can't overlook the financial damage to IBM from fighting an expensive 13-year battle against the Department of Justice (and the cost to U.S. taxpayers) - imagine if instead of spending millions, maybe billions of dollars fighting the government, IBM had invested those resources in research and new product development at a critical period when the industry was shifting from mainframes to PCs.
Congratulations to Big Blue for a major business milestone of surviving 100 years in the most competitive marketplace in the world, and for surviving several lawsuits brought by the most powerful government in the world.