BAYLES, JASPER P.

NAVA, ANDRELU

IBM Case A and B

1) Introduction: The call for Roadmaps (Blackrock) and the debate over earnings guidance
(give it/don't, short-term vs. long-term, etc.). Here we have a firm giving an unusual amount of
detail over the long term. Student vote: if you were Sophia Johnson, what you recommend to
clients (buy, hold, or sell IBM shares), and why?

ANSWER: If I were Sophia Johnson, I would recommend to sell the IBM shares. At the time
that Sophia was supposed to make the decision, the IBM was trading at $190 per share. I
consider that as the “target price” to make a sale. Any price higher than that might be too
challenging for IBM to support, and what might follow is a nosedive in the price. Also, at
around that time, IBM’s fundamentals - its net income, operating net income, and total revenues
- were going down. These are signs of “business stress” that will surely negatively affect the
stock’s price in the near future.

2) Creating the 2010 Roadmap: Why did CEO Palmisano create and publicly announce the
2010 Roadmap in May 2007? What were the objectives? Who was the intended audience? Was
it a good idea to do? Why don’t more firms do it?

ANSWER: CEO Palmisano created and publicly announced the 2010 Roadmap in May 2007 to
give clarity to IBM’s shareholders. As stated in the case, even though IBM and its management
were introducing considerable changes to the company, the shareholders still found it difficult to
understand how IBM operates. The 2010 Roadmap aimed to present its operations in such a
way that the shareholders could relate to them, and what better way than to give the shareholders
a simple, attainable, and clear goal? The roadmap did not only present a goal but also the ways
in which to reach that goal.
 We believe that creating and publicly announcing the roadmap was a good idea because
it not only clarified IBM’s operations to its shareholders, it also helped the company and its
stakeholders focus their efforts toward a singular goal even if the market was constantly
changing. In other words, a roadmap is a constant to an evolving business environment.

Roadmaps may generally seem advantageous but they also have a few pitfalls, hence, not
all firms utilize roadmaps. First, the company and its stakeholders might focus all their energies
in following the roadmap which may result to losing sight of some other opportunities that the
company might come across. Second, the roadmap might blind the company from some other
problems that it might be facing or will be facing. Also, roadmaps, including the strategies and
the results involved, might change through time because of the volatile nature of the market.

3a) Assessing the 2010 Roadmap: Was the 2010 Roadmap successful? How would you assess
the firm’s financial performance from 2007-2009 (through the financial crisis)? Why did they
declare victory early?

ANSWER: If success is measured by a single criterion alone, and that is whether or not the
goal is reached, then the answer would be YES. Yes, IBM’s 2010 Roadmap was successful.
The goal was for the EPS to be $11.00 and the company did reach it.

Between 2007-2009, IBM’s financial performance could be considered as an “efficient

improvement”. According to the case, gross, operating, and net margins all improved by 3%. In
addition, the business at that time was considered as profitable due to acquisitions, divestitures,
and organic growth.

IBM’s Operating Margin was steadily increasing between 2007 to 2009 (14.7%, 16.5%,
and 19.5%). The operating margin is an important indicator of a company’s profitability and
efficiency. An increasing profit margin means that the company is controlling expenses and
generating revenue (and sales). Likewise, IBM’s current ratio seemed steady between these
years (with slight fluctuations), which means that the company can handle its outstanding debts.

IBM declared victory early because they might be confident in the results of their
operations. Also, this is a signal to the stakeholders that IBM will continue with its successes.
3b) Transition: How is the 2015 Roadmap different from the 2010 Roadmap?

ANSWER: The differences between the 2015 Roadmap and the 2010 Roadmap are as follows:

First, the 2015 Roadmap will use the operating EPS instead of the 2010 Roadmap’s GAAP EPS.
According to the case, “operating EPS provides greater transparency on operating results,
enable more accurate comparisons with peer firms, and allow for a better long-term view of the
core business.” Second, the 2015 Roadmap was developed bottom-up, unlike the 2010
Roadmap which was created top down. This means that everyone involved in the
implementation of the 2015 Roadmap was part of the planning process, as well.

3) Assessing the 2015 Roadmap: Has the 2015 Roadmap been successful so far (as of May
2014)? How would you assess IBM’s performance from 2010 through the first quarter of 2014?
Why is IBM having trouble growing? Are the problems serious or just temporary?

ANSWER: As of May 2014, the 2015 Roadmap could not be considered as successful. As
stated in the case, the company’s first-quarter net income, operating net income, and total
revenues all went down. In addition, the company’s debt to total capitalization ratio is higher
compared to the previous years (except for 2008). A higher ratio means that IBM carries a
higher risk of insolvency.

4) Managerial Decisions (one or both questions): What should Rometty/Schroeter do: affirm,
adjust, or abandon the 2015 Roadmap?

ANSWER: If I were Rometty or Schroeter, I would adjust the 2015 Roadmap. Abandoning it
would would mean that there is organizational or political turmoil within the company.
Abandoning the 2015 Roadmap entirely would be like saying that the present management does
not support the previous management and its plans. Adjusting it, however, to suit the current
demands of the times seems more reasonable and politically sound. Palmisano (at around the
mid of 2010) was the one who adopted the 2015 Roadmap, and Rometty “inherited” it in 2012.
There was a lot of changes in those two short years and it would be reasonable for Rometty to
make changes to it.

5) Conclusion: Description of what happened; discussion of why it happened (why did IBM
have trouble growing? why has it lost so much revenue and income?)

ANSWER: When IBM publicly released its roadmaps, there were good and bad feedback from
critics. One of these critics is BusinessWorld, which deems Palmisano’s management as a
“toxic mix of unsustainable policies.” As mentioned in the case, when Palmisano was CEO, he
created a new value statement: “Dedication to every client’s success,” “Innovation that matters,”
and “Trust and personal responsibility in all relationships.” But upon a thorough reading of the
case, this value statement seemed to have taken a backseat, and instead, Palmisano focused on
growing the earnings per share no matter what. In other words, the value statement was just
that: a statement - but it was not put into action. Palmisano deemed a business as simply making
money for the shareholders (and, eventually for himself, considering that he got an exit package
of $225 million).

Even Palmisano’s strategy of buying back company shares by acquiring an $11.5 billion
debt is a warning sign. Palmisano stated [in the case] that the purpose of this share buyback is to
increase the ownership stake of the stakeholders, and to maximize return for the shareholders.
However, another reason for buying back shares is to improve the financial ratios of the
company, and this is just a poor motive. Buying back shares could be a cover-up for problems
with management. Whatever the real motive for these stock purchases, it should be noted that it
costed IBM a considerable amount to do so.

Moreover, despite Palmisano’s value statement of “Innovation”, the truth of the matter is
that IBM has been constantly failing on this matter. It should be noted that during Palmisano’s
term, what he did was acquire existing tech companies instead of IBM developing its own tech.
Again, showing that IBM operations were not lead by values but by money (EPS, in this case).
Just imagine the impact on the employees’ morale on this constant acquisitions.
 The “toxic policies” and relentless goal for higher EPS are unsustainable in the long run,
and this is what caused IBM’s downfall.

References:

Denning, S. (2014, May). Why IBM is in Decline. Forbes Media LLC. Retrieved August 23, 2019 from
https://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/#4b6c8c243e48

Investopedia (2019, January). How Should I Analyze a Company's Financial Statements? Investopedia:
Investing-Fundamental Analysis. Retrieved August 23, 2019 from
https://www.investopedia.com/ask/answers/040315/how-should-i-analyze-companys-financial-
statements.asp

Jansen, C. (2019, August). Stock Buybacks: A Breakdown. Investopedia: Investing-Fundamental Analysis.

Retrieved August 24, 2019 from https://www.investopedia.com/articles/02/041702.asp

Kenton, W. (2019, May). Total Debt to Capitalization Ratio Definition. Investopedia: Investing-Fundamental
Analysis. Retrieved August 24, 2019 from https://www.investopedia.com/terms/t/total-debttocapitalization-
ratio.asp

Little, K. (2019, August). When to Sell Your Winning Stock. The Balance.Make Money Personal. Retrieved
August 23, 2019 from https://www.thebalance.com/when-is-right-time-to-sell-a-stock-3140959
 CASE STUDY NO. 1
GENERATING HIGHER VALUE AT IBM
DMB 310

Submitted by:
BAYLES, JASPER P.
NAVA, ANDRELU

Submitted to:
STEPHANIE S. CALAMBA, Ph.D.

August 24, 2019