Nov 28, 2016, 9:56 am ESTDana Blankenhorn, InvestorPlace Contributor
Believe it or not, the tech giant is more vulnerable to a takeover than ever. And IBM stock could use it.
Since February, the hottest blue-chip tech stock this side of Amazon.com, Inc. has been International Business Machines Corp. Since its mid-February low, IBM stock is up nearly 33%. To put that in perspective, that’s double the gain you have seen in Microsoft Corporation, nearly triple that of Oracle Corporation and four times more than you’ve gotten with Google parent Alphabet Inc.
What is going on?
IBM simply isn’t growing. Revenues for the most recent quarter were $19.226 billion, nearly on par with those of a year earlier, $19.280 billion. Year-over-year net income is down, from $2.962 billion to $2.854 billion. Debt continues its slow march upward, as a percentage of assets, and cash flow is just stable.
Some people are buying for value. The company’s yield of 3.4% looks attractive, and the dividend is covered twice over by earnings. The price-to-earnings ratio of 13.3 on IBM stock remain low, and analysts are pretty cold toward shares.
What do buyers know that you don’t?
Is IBM for Sale?
While IBM has been going nowhere this decade, other tech stocks continue to grow. IBM is no longer the biggest fish in the pond.
Right now, Apple Inc. is worth four times what IBM is worth. Microsoft could buy IBM three times over. Alibaba Group Holding Ltd. is worth more than IBM, and so is Oracle.
So, for that matter, is Tencent Holdings Ltd. The market cap of this Guongdong, China-based internet and gaming company dwarfs that of IBM. Which brings up the question of a foreign buyer coming in for the company.
Any overseas bid, whether from an Internet company like Tencent, or another firm backed by China’s sovereign wealth fund, would likely create panic in both New York and Washington. But it would also put IBM stock in play.
IBM has attractive software assets and has been hiring like mad for its Watson cognitive computing operations.
Despite this IBM remains a troubled company. Its corporate culture, once the envy of the business world, is now better at turning out talent for others than for itself. It is increasingly unable to execute under CEO Ginni Rometty, who suddenly seems more interested in offering political advice than turning the company around.
IBM, in short, remains a sleeping giant. It needs a wake-up call.
A takeover battle could be just what it needs.
Break Up IBM
Breaking up IBM stock may be more profitable than keeping it together, once investment bankers and hedge funds start looking at it.
IBM’s mainframe business may be going away, but it’s not going away quickly. There is still a lot of profit to be wrung out of it. IBM continues to churn out hardware, including at the chip level, and this could interest companies like Intel Corporation or even Taiwan Semiconductor Mfg. Co. Ltd. whose market cap is now close to that of IBM’s own.
As to the cloud, IBM was late to the party and may be unable to make it in cloud on its own. That could be the spark that leads to all the takeover speculation.
Hiving off hardware would reveal IBM’s contract programming and software businesses. An outsourcing company like Cognizant Technology Solutions Corp might be interested in the former.
Meanwhile, rivals like Google and Microsoft might be able to make some money off Watson, if it were not attached to the rest of the business.
Bottom Line on IBM Stock
The point is that IBM is vulnerable, as it has not been vulnerable since Thomas J. Watson began pulling it together in 1915. It is leaderless, rudderless and may well be worth more dead than alive.
If any shark, foreign or domestic, makes a move toward it, IBM stock could spark the biggest corporate feeding frenzy of the decade.
Will it happen? Can it happen? Well, you can take a 3.4% yield while you wait to find out.