https://www.barrons.com/articles/ibm-stock-rises-ceo-change-arvind-krishna-ginny-rometty-51580493129
Can Arvind Krishna turn around IBM ?
Thursday night, IBM (ticker: IBM) named Krishna as CEO, effective in April. He succeeds Ginny Rometty, who had a troubled term in the top job. Sales fell 25% and the stock slid 20% during her eight-year tenure.
As Wolfe Research tech strategist Steve Milunovich has pointed out, in January 2013, IBM and Microsoft (MSFT) had the same market capitalization, and now Microsoft is 10 times larger. The hope on the Street is that Krishna can do for IBM what Satya Nadella did for Microsoft—focus on the cloud and produce huge growth and shareholder returns.
At midday on Friday, IBM stock was up 4.4%, while the Dow Jones Industrial Average had fallen 1.8%.
Like Nadella, Krishna is a longtime executive with a deep academic background. Krishna has a Ph.D. in electrical and computer engineering from the University of Illinois at Urbana-Champaign. He’s spent his career at IBM, joining the company in 1990, and lately has been running the company’s cloud business. (That is what Nadella was doing at Microsoft before being elevated to the top job.)
That Rometty is stepping down is no big surprise. IBM’s previous two CEOs, Sam Palmisano and Lou Gerstner, both retired at age 60. Rometty is 62.
But Krishna is something of a surprise choice. Milunovich wrote in a recent research note that he had expected IBM to choose former CFO Martin Schroeter, now head of IBM Global Markets. He and others had speculated that Red Hat CEO Jim Whitehurst also might be the choice. That was half right: Whitehurst was given the additional title of IBM president, making him the clear second in command.
Bernstein analyst Toni Sacconaghi wrote in a research note that Krishna is a little older than past CEOs, at 57. Rometty started at 54, while Palmisano and Gerstner were both 51.
Sacconaghi also noted that Krishna is the first technologist to lead the company in several decades: Rometty came from the services business, Palmisano from sales, and Gerstner from consulting and packaged consumer goods. “Our sense is that given the structural forces at work in the industry—and the importance of cloud—IBM felt it was important—and we agree—to have a technologist as its CEO at this time,” Sacconaghi wrote.
“Krishna and Whitehurst have complementary skills sets,” he said. “Krishna had never run a large business at IBM until he took on his current role a year ago, though he is known internally as a change agent with deep understanding of the broader technology landscape; Whitehurst has proven operational skills, as CEO of Red Hat as well as COO of Delta Air Lines. We think the skills sets could match up well.”
Krishna will be under pressure to boost IBM’s revenue-growth rate, and perhaps to sell or otherwise dispose of underperforming operations. But that might not be easy to do.
Sacconaghi noted that there has been speculation that the company could divest either the Global Technology Services segment, an IT outsourcing business, or Global Business Services, the company’s consulting arm, which dates back to the 2002 acquisition of PricewaterhouseCooper’s consulting business. “IBM’s integrated go-to-market strategy makes it difficult to sell either without an impact on associated hardware and software sales,” he wrote. And he thinks the company is unlikely to do another large acquisition until the Red Hat deal, completed last year, proves successful.
Instinet analyst Jeffrey Kvaal noted that the management change follows a better-than-expected December quarter earnings report, which featured year-over-year revenue growth for the first time in many quarters. He said the management change is “an opportunity for IBM to reset its narrative just as it returns to sustained revenue growth,” and added that Krishna’s appointment “may allow him to hasten the pace of change at IBM,” though a major change of direction or shift in business mix seems unlikely.
BofA Global analyst Wamshi Mohan, who has a Buy rating on the shares, appeared unsurprised that the stock moved higher on Friday. “CEO transitions often can mark a turnaround in sentiment and strategy,” he wrote. “We view this announcement as having the potential to drive a positive multiple re-rating in the story with the potential to pivot towards sustainable growth.”
Milunovich, the Wolfe Research strategist, sees IBM’s decision to pick Krishna as “a pleasant surprise,” noting that the choice reflects the importance of technical expertise, the need for an IBM insider to run the company and the board’s confidence in Krishna’s communications abilities.
He thinks the pick is bullish for the stock, but he doesn’t see IBM as “the next Microsoft.” He cautions that “the cloud horse has left the barn,” saying that while he is skeptical that IBM will catch up, “now there is more hope.”