IBM Bull's Rebuttal
by Louis Corrigan ([email protected])

David's subtle allusion to IBM's bygone halcyon days is amusing. The only thing it ignores is the last five years! Sure, IBM has been "an absolutely horrible investment over the last decade," but it's also been an absolutely wonderful investment since bottoming out at $20 5/16 in August 1993. Its 500% plus return since then has bested 99.999% of all mutual funds! So if the question is "what have you done for us lately," IBM's answer is "a whole lotta lotta."

What David is ignoring is that IBM has been in turnaround mode since Gerstner arrived. From an investor's standpoint, he's largely succeeded so far. Yet as Eastman Kodak's George Fisher can attest, turning around a behemoth that's stuck in a rut takes time. How do you change a corporate culture that's basically defined corporate culture?

Now, I certainly don't think that IBM will prove the single best-performing technology stock over the next decade. I agree with David that the smaller, nimbler player that can focus on a specific mission is likely to grow faster and deliver more to investors. Of course, everyone who's lost a ton of money in Iomega over the last two years thought they had found such a niche player. Ditto those who invested in Manugistics or Ciena or Vantive, etc.

Betting on a basket of niche players, you may find some winners and some pretty sorry losers and end up about where you would have had you just stuck with Big Blue. The fact is, IBM's bulk allows it to spend more on research each year than most of these hot tech names will ever make in annual revenues. In my view, that creates the kind of insurance policy that makes IBM a happily boring investment, especially if you have a problem with losing half your portfolio's value in a downturn.

I also agree that IBM's vast array of businesses can be pruned back to create higher returns going forward. Gerstner also knows this. All that means to me is that even after the turnaround, IBM still offers turnaround type restructuring opportunities. Again, that's a positive.

Of course, David doesn't pay much attention to the ways that IBM has been reinventing itself for e-business. The acquisitions of Lotus and Tivoli have complemented the astonishing growth that's made IBM the world leader in information technology services, which is one of the fastest-growing areas of the world economy. Simply put, IBM is all over the networking world. As important, IBM has repositioned the mainframe, boosting performance while lowering prices. Mainframes can host both the Web server and business data on one machine. Indeed, the Web seems likely to revitalize rather than kill the mainframe business.

David asks whether market-beating growth will come from large clunky mainframes or smaller PCs. What's interesting about the question is that IBM's Thinkpad notebook is the best franchise in one of the few remaining really profitable areas of personal computing. Meanwhile, Dell has proven in the last year that it can profit in the PC realm only by avoiding the lower-end of the market. Compaq has gained market share in the low-end but decided it needs to move in the direction of IBM by beefing up services if it hopes to maintain profits. Bottom line: There is no bottom line in small PCs.

In addition, neither Dell nor Compaq has any kind of edge in what promises to be the real high-growth area of the computing world -- small digital gear that takes the brains of PCs and the connectivity of the network to new corners of our daily lives. IBM's multi-billion dollar research budget and manufacturing know-how actually make it incredibly well-positioned to become a supplier of choice for such products as the world becomes increasingly wired.

Next: The Bear Responds