I just stumbled across your writing and I love it!
I have been reading it all weekend. The more I read, the more I have this weird sensation in my frontal cortex. I believe it used to be called "thinking" before the new world order arrived. Almost stimulating....like the stuff before decaf...
What a fresh perspective you provide! You challenge my preconceived notions from CNN, and that is scary.
Please keep up the good work.
Yours Truly,
Ron
What took you so long, Ginni?
That was my first reaction when I heard International Business Machines Corporation (IBM) was making a big strategic shift by purchasing open source cloud company Red Hat (RHT) in a landmark $34 billion deal.
Ginni Rometty, IBM’s CEO since 2012, has presided over persistent negative sales growth and has done zilch for investors to conjure up some type of lasting hope for this company.
Not only has Rometty failed to grow the top line, but with an underwhelming 3-year EPS growth rate of -2%, the execution and performance haven’t been there as well.
Somehow and someway, she has maintained an iron-clad grip on her job at the helm of IBM and her legacy at IBM will be wholly determined by the failure or success of this Red Hat acquisition.
IBM shares sold off on the news as shareholders digested this bombshell.
Rometty took a hatchet to share buybacks and suspended them for 2020 and 2021 alienating a segment of their loyal shareholder base.
I can tell you one thing about this move – it smells of desperation and it won’t vault IBM into the conversation of Amazon (AMZN) Web Services or the Microsoft (MSFT) Azure.
The biggest winner of this deal is Red Hat’s CEO Jim Whitehurst who has been dangling the company for sale for a while.
Alphabet (GOOGL) was in the mix and had the opportunity to snag a last-second deal, but it never came to fruition.
The 63% premium IBM must pay for a company who only grew quarterly sales 14% YOY and quarterly EPS by 10% is expensive, but that is where we are with IBM.
Clearly overpaying was better than doing nothing at all.
IBM continues to hemorrhage sales and stopping the blood flow is the first step.
Rometty was responsible for the utter failure of artificial intelligence initiative Watson whose terrible management was a key reason for its implosion.
Analyzing this historic company gave me insight into the pitiful causing me to write a bearish story on IBM last month. To read that story, please click here.
Not only was the agreed price exorbitant, but Red Hat’s stock was trending south even before the interest rate induced sell-off rocked the tech sector of late.
Red Hat missed on sales revenue forecasts and offered weak guidance.
It could be the case that Whitehurst was actively seeking a buyer because he felt that Red Hat would go ex-growth in the next few years.
Red Hat was rumored to be on the market for quite a while looking to fetch a premium price for a company starting to stagnate with its visions of grandeur growth.
Rometty’s career-defining moment is high-risk and high-reward and is born out of being cornered by leading tech companies leaving IBM in their dust.
The deal finally allows IBM to return back to sales growth which will occur two years later, and Rometty will finally have that monkey off her back for now.
But the bigger question is will Rometty still have her job in two years if this experiment becomes toxic.
My guess is that Red Hat CEO Jim Whitehurst is automatically the next in line for the IBM throne if Rometty missteps, and piling on pressure will force IBM to evolve or die out.
And even though they will return back to growth, 2% growth is no reason to do cartwheels over.
The real work starts now and it will take years to turn around this dinosaur.
On the brighter side, the massive deals instantly improve sentiment that was flagging for years and puts IBM back on the map.
The synergies between IBM and Red Hat could be robust.
Red Hat can surely help IBM become a higher-quality hybrid cloud solutions company.
Models like this are the industry standard as luring a company into your cloud is one thing, but being able to cross-sell a plethora of extra add-on software services in the cloud is the necessary path to raising profitability.
IBM also inherits a slew of talented software engineers that it can mobilize for innovative cloud products. Red Hat’s products such as JBoss middleware and the OpenShift software for deploying applications in virtual containers could make IBM’s hybrid cloud more appealing and could help retain customers with the additional offerings.
Doubling down on the software side of the business was a strategy I pinpointed at the Mad Hedge Lake Tahoe conference and deals like this highlight the value of this type of assets.
There is a hoard of legacy tech companies like Oracle (ORCL) that is in dire need of such strategic injections and fresh ideas.
This won’t be the last deal of 2018, other cloud deals could shortly follow.
On the other side of the coin, hardware deals have turned rotten quickly with stark examples such as Hewlett-Packard’s (HPQ) $25 billion acquisition of Compaq, Microsoft’s $7.2 billion disastrous buy of Nokia’s mobile handset business and Google’s unimpressive $12.5 billion deal for Motorola Mobility that they later unloaded to Chinese PC company Lenovo.
Investors must be patient if IBM has any chance of completing this turnaround.
Listening to Rometty talk about this deal clearly reveals that she is hyping it up for something way bigger than it actually is.
Let’s not forget that Rometty’s tenure as CEO began in 2012 when IBM shares were trading north of $200 and she has presided over the company while the stock got pulverized by almost 30%.
It pains me that she is the one given the chance to turn the company around after years of underperformance.
Let’s not forget that at the end of 2017, IBM only had a 1.9% share of the cloud infrastructure, about 25 times smaller than Amazon Web Services.
The costly nature of the deal could also put a dent into IBM’s dividend, alienating another swath of its hardcore shareholder base.
Historically, IBM has had minimal success with transformative M&A and the industry competitors dominating IBM magnify the poor management performance headed by Rometty.
Rometty declaring that this deal means IBM will be “no. 1 in hybrid cloud” is overly optimistic, but this is a move in the right direction and could keep IBM spiralling out of control.
A return to sales growth might help stem the bleeding of its downtrodden share price, but Amazon and Microsoft are too far ahead to catch.
Investors will need to wait and see if the synergies between IBM’s and Red Hat’s products are meaningful or not.
“Growth and comfort do not coexist.” – Said CEO of IBM Ginni Rometty
“Every geopolitical crisis in the world is squarely pointed at the heart of Europe right now, be it terrorism, the collapse of Europe, or the currency crisis, and that means it’s focused on Chancellor Angela Merkel of Germany,” said my friend Ian Bremmer, of the political consulting firm, Eurasia Group.
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Mad Hedge Hot Tips
October 30, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) General Electric Cuts its Dividend, from 12 cents a share to one cent after reporting a breathtaking $22.8 billion loss. The Feds have opened a criminal investigation into accounting practices. This may define the final bottom in the stock. Take another look at those long-term LEAPS. Click here.
2) UK to Implement Digital Tax, which will raise $500 million in revenues, which is sofa change. It's big tech’s worst fears realized. It’s why Amazon lost $100 billion in market capitalization yesterday. Click here.
3) Oil Hits a Three-Month Low, slaughtering hedge funds everywhere. This makes no sense against a 3.5% GDP growth rate and looming Iran crisis. Is Texas tea now predicting a recession in 2019? Click here.
4) Who Was That Idiot Who Told You to Sell Volatility Too Soon? Oops, it’s me. But now may be another time to take a bite of the apple. Click here.
5) Personal Consumption Expenditures Up Only 0.1% in September. Inflation is nowhere to be seen, meaning the December Fed rate hike is a sure thing. Just what you wanted to hear. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(HERE IS YOU BEST PERFORMING ASSET OVER THE NEXT 30 YEARS)
(HOW ARTIFICIAL INTELLIGENCE WILL ENHANCE OR DESTROY YOUR PORTFOLIO)
(TSLA), (AMZN), (FB)
Global Market Comments
October 30, 2018
Fiat Lux
Featured Trade:
(HERE IS YOU BEST PERFORMING ASSET OVER THE NEXT 30 YEARS)
“Stocks are like people. They never look so good as they do at their peak,” said Donald H. Gold.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Mad Hedge Technology Letter
October 30, 2018
Fiat Lux
Featured Trade:
(HOW ARTIFICIAL INTELLIGENCE WILL ENHANCE OR DESTROY YOUR PORTFOLIO)
(TSLA), (AMZN), (FB)
