by Celena Peng '16
One of the biggest news in the stock market last week was the huge plunge of IBM’s stock price, falling around 10% and wiping out about $20 billion in shareholder value. This happened after the disappointing Q3 Earnings report came out on October 20, showing that IBM endured $3.68 per share of operating earnings, down 8 percent year-to-year and $22.4 billion quarterly revenues, down 4 percent year-to-year. With falling revenues in 10 consecutive quarters, the company also admitted that it wouldn’t meet a key profit goal of earnings at least $20 a share by 2015, which drove the stock price down even more and concerned many investors. In addition to the falling revenues and operating margins, the company is paying Globalfoundries, $1.5 billion to get rid of the profit-losing semiconductor operations business. People may usually think that IBM would get money from selling off a business unit, not the other way around.The company, known for its stock buyback for decades, just announced it would add $5 billion more to boost its buyback plan. By reducing the number of shares outstanding in the market, buybacks increase the shares the company itself owns, and cause the earnings per share to increase at a relatively faster pace than the profits grow. For the past 20 years, IBM has halved the number of shares outstanding, from 2.3 billion in 2013 to fewer than 1 billion shares right now. From 2009 to 2013, two buybacks were announced annually, with value of at least 8 billion each year. However, critics are saying IBM should use these free cash more efficiently, such as acquiring new business units, and investing in research and product development, in order to match up with the current trend in the technology industry.One of the key changes in the industry is the massive use of the cloud technology. Since the acquisition of SoftLayer Technologies Inc. in 2013, IBM has shifted its focus to the cloud, where users can store and access to data and resources online. The cloud services generated about $3 billion revenues, out of IBM’s total $100 billion revenues last year. Compared to the peer competitors such as Apple Inc. and Amazon, IBM still has not done enough to pivot its focus on such new area. One suggestion that has been made is to take over Box, a cloud-storage provider targeting at a wide range of industries, from manufacturing to finance. The takeover might make IBM get more oriented in the cloud service area, besides keeping its core business in the enterprise software, as what IBM is known for.Another option IBM could take is a strategic sell-off of its business units. Just as Hewlett-Packard Co. is splitting up and EBay spins off Paypal, IBM might do in the similar way to ensure a niche position in certain areas. The company has sold off its PC-business and low-end serve unit to Lenovo in past years. And it is paying $1.5 billion to take off its semiconductor business. As the industry has seen greater development in the cloud computing, data analytics and customer service, it would be interesting to see what’s the next step for IBM to take, in order to have more positive impact on its business.Sources:IBM Growth Remedy Is Acquisitions, Not Buybacks: Real M&A (http://www.bloomberg.com/news/2014-10-22/ibm-growth-remedy-is-acquisitions-not-buybacks-real-m-a.htmlIBM Turns to Familiar Source of Relief: More Buybacks (http://blogs.wsj.com/moneybeat/2014/10/28/ibm-turns-to-familiar-source-of-relief-bigger-buybacks/?KEYWORDS=ibm)Putting IBM’s $5 Billion Buyback in Perspective (http://blogs.wsj.com/moneybeat/2014/10/28/putting-ibms-5-billion-buyback-in-perspective/?KEYWORDS=ibm)Globalfoundries to Take Over IBM Chip Unit (http://online.wsj.com/articles/globalfoundries-to-take-over-ibm-chip-unit-1413763188?KEYWORDS=ibm)Photo:http://si.wsj.net/public/resources/images/BN-FD696_BLUECH_G_20141022175335.jpg