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IBM falls as Buffett reports reduced stake ahead of meeting
[NEW YORK] Warren Buffett is acknowledging what many investors have already realised: IBM's long-promised reinvention is slow, painful and nowhere near close to the end.
In an interview with CNBC, the billionaire chairman and chief executive officer of Berkshire Hathaway Inc. disclosed that he sold about a third of the firm's investment in the computer-services giant during the first half of this year. Before the sales, Berkshire held about 81 million shares. The news led IBM to tumble as much as 3.8 per cent to US$153.00 Friday in New York, its lowest intraday price since November.
IBM has been frustrating investors for years, reporting in April its 20th straight quarterly revenue decline. The company once synonymous with mainframe innovations has been slow to adopt cloud-related technologies and has had to play catch-up to the likes of Amazon.com Inc. in offering computing and other software and services over the Internet.
"I don't value IBM the same way that I did six years ago when I started buying," Mr Buffett told CNBC. "I've revalued it somewhat downward." Mr Buffett said that in looking back at how IBM thought their business would develop, "what they've run into is some pretty tough competitors." He may have been thinking about Amazon Web Services, said UBS analyst Steve Milunovich. Amazon's cloud-computing offerings command about 45 per cent of the market for infrastructure as a service, where companies buy basic computing and storage power from the cloud.
"Mr Buffett often has praised Jeff Bezos," Amazon's CEO, Milunovich wrote in a note Friday. "Even though IBM positions hybrid cloud as a destination rather than a transition, AWS threatens Big Blue's on-premise computing dominance." Credit rating companies are also more pessimistic. Standard & Poor's cut IBM's bond rating to A+ from AA- on Friday, saying operating profit margins won't improve as much as projected and its transition "to operating stability will take longer than we had previously forecast."
Moody's Investors Service downgraded to A1 from Aa3 on Thursday, saying the company's transition and investments are hurting profitability and cash flow.
Initial Interest Berkshire started building its International Business Machines Corp stake in 2011, and eventually became the company's largest shareholder, with an investment valued at almost US$13 billion. With his initial interest, Mr Buffett was betting on IBM's expertise in information technology services to drive growth in emerging markets. At the time, then Chief Executive Officer Sam Palmisano, was steering Big Blue toward services and software and away from hardware. To achieve that, he'd been making aggressive stock buybacks, spending more than US$15 billion annually on repurchases during his last two years at the company. IBM abandoned that goal in 2014 under CEO Ginni Rometty, sending shares spiraling.
Ms Rometty, who took over in 2012, has slowed the pace of share buybacks in recent years, spending instead on acquisitions to bolster growth areas. While IBM is working to become a cloud purveyor, its new services and software haven't been growing fast enough to counter the slowdown in some of its major business lines, such as traditional information-technology services, which have been declining quickly.
After a run of three straight annual declines, IBM's shares gained about 21 per cent in 2016 but are still more than 25 per cent lower than the company's 10-year peak in 2013. The shares have lagged behind technology peers and the S&P 500 Index in 2017.
Without the Buffett buffer, IBM may receive more scrutiny around when they'll reach that inflection point.
"This may put some pressure on management to be more aggressive in returning to growth," Anurag Rana, a Bloomberg Intelligence analyst, said in an email. Other investors "may get impatient." Thousands of Berkshire investors will gather in Omaha, Nebraska, for Berkshire's annual meeting on Saturday. Mr Buffett, 86, and Vice Chairman Charles Munger, who regularly field questions from shareholders at the event, can expect to be quizzed about IBM - as they have been in the past.
Representatives of Berkshire and IBM didn't respond to requests for comment.
While Mr Buffett is known for sticking with stocks like Coca-Cola Co for decades, he's not wedded to old favorites when circumstances change. In recent years, he got rid of most of Berkshire's stock in Procter & Gamble Co and Wal-Mart Stores Inc. He cited the competition facing Wal-Mart from online rivals like Amazon.com Inc., while pointing in 2012 to disappointing results at P&G. The billionaire also exited most of its stake in Graham Holdings Inc., after that company sold the Washington Post newspaper. Mr Buffett was previously on the board of the Washington Post Co., and the stock was one of his best investments.
Berkshire stressed in its annual report in February that it's willing to exit long-time holdings in its stock portfolio, contrasting that flexibility with Mr Buffett's commitment to permanently hold most companies that he acquires outright.
"It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we're talking 20/20 vision)," Mr Buffett wrote in the letter. "But we have made no commitment that Berkshire will hold any of its marketable securities forever." Two common yardsticks for value investing show IBM's assets being downgraded by the market while estimated earnings have failed to keep pace with the stock price.
The company's price to book ratio has receded to near its 2011 level while price to earnings growth has increased by about 75 per cent.