A CEO succession may be the hardest trick any tech company can pull off.
What happened after Bill Gates left Microsoft (NASDAQ:MSFT)? After Bill and Dave left Hewlett-Packard (NYSE:HPQ)? What do you expect after Larry Ellison leaves Oracle (NYSE:ORCL)? Tech companies tend to be led by vivid entrepreneurs, and systems don't seem to work.
Even IBM (NYSE:IBM) floundered after Thomas Watson Jr. left. A succession of smooth-talking marketing men found themselves vulnerable to the first kid with a clue who came along. Fellow named Gates.
Everyone knows by now that Lou Gerstner set a new direction for Big Blue, starting in the mid-1990s. Services became the key. Margins became the metric. He passed the company to Sam Palmisano, and IBM quietly got through the last decade in very good shape. The share price quadrupled, and the dividend came roaring back.
But Palmisano's biggest trick may have been his own succession. I was highly skeptical of Virginia Rometty (known as "Ginni") when she was named to the top job last year, and I'm here to eat crow.
Rometty has been excellent.
Consider her first big acquisition: Texas Memory Systems makes sub-systems out of flash memory chips. The deal was done very quietly, announced early this month, price not disclosed.
Flash has moved steadily over the last decade from replacing floppies to replacing hard drives in PCs. Now the technology is being priced for clouds, it's faster and more reliable. That means huge demand, fat margins, a perfect market for IBM.
Better yet, consider her first big asset sale. IBM quietly sold its "retail store" business (read: cash registers) to Toshiba this month.
The money is in the processing anyway, and you know what kind of machine you need for processing credit card transactions? Mainframes. IBM still has a monopoly there. If something interesting comes up in the mobile space, of course, IBM can still buy it.
Under Palmisano, and now Rometty, IBM quietly anticipates customer needs and gets there before the crowd.
Enterprise management was a big deal in the last decade. IBM bought Tivoli Systems years before it became such. Computer security is a big deal today, and IBM bought ISS, a leader in tracking down problems in real-time, a decade ago.
Then there's the question of style. I really like Virginia Rometty's style. Consider how she handled the first big "crisis" of her regime, the Augusta National Golf Club.
By tradition, the CEO of IBM is a member of the club. The comapny is a huge sponsor of its annual tournament, The Masters. But Rometty is a woman, and the club has never had women members. When a woman named Martha Burk banged on the door to be let in a decade ago, it was loudly shut in her face.
What did Rometty do? She said nothing. She simply came to the tournament and sat at the 18th green on the last day wearing a pink jacket.
When Augusta announced its first female members this week, she wasn't on the list. Her name will be added, quietly, and when it is there will still be no headline.
IBM's revenue is increasingly coming from the developing world, and its headcounts are following. Fewer U.S.-based employees, more employees closer to customers. You think having a major lab in Nairobi won't bring in African customers? Then consider the impact on costs, and profit margins.
Big companies will always be subject to the pull of global economic trends. IBM suffered during the great recession, but it has now recovered and operating margins are close to 20%. The 85 cent/share quarterly dividend continues. Better than a 10-year government bond.
I stuck some money into IBM sometime in the last decade, and I forgot about it. It has been my best investment, doubling in value and giving me more shares through dividend reinvestment. I think it will remain that.
Disclosure: I am long IBM, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.