January 31, 2020 / 1:56 AM / a month ago

Breakingviews - Will IBM be the next Microsoft or Nokia?

A man stands near an IBM logo at the Mobile World Congress in Barcelona, Spain, February 25, 2019. REUTERS/Sergio Perez

NEW YORK (Reuters Breakingviews) - Arvind Krishna, IBM’s incoming chief executive, has a tough task ahead of him. He will replace current boss Virginia Rometty in April, the company announced on Thursday. Shareholders won’t miss her: At $121 billion, Big Blue’s market value has almost halved since she took the reins at the start of 2012. It now has a reputation as a former hardware provider that lost its way when the world moved on. Microsoft’s resurgence under boss Satya Nadella offers the best path ahead.

The two companies were both worth roughly $220 billion when Rometty took charge of IBM. One of her recent strategic moves even echoes those of former Microsoft boss Steve Ballmer. He paid way above the odds for a couple of companies in an attempt to leave behind the company’s stodgy image - before being effectively forced out in 2014. Rometty, meanwhile, splashed out too much in her $34 billion acquisition of Red Hat unveiled in 2018.

Nadella managed to get past Ballmer’s deals, despite adding a pricey-looking takeover of his own with LinkedIn, and has overseen a largely successful upgrade and expansion of its software while also growing its cloud-computing business, where revenue grew 62% in its most recent quarter. That makes it the main contender to industry leader Amazon. Over the past eight years the value of the company has increased six-fold to $1.3 trillion.

There’s plenty that could go wrong, of course. Krishna, who currently leads the cloud division, was instrumental in the Red Hat deal. That was designed to catapult IBM into the cloud business but has yet to show the purchase was worth the price paid. The fate of Finnish telecom company Nokia provides an instrumental lesson on how turnaround attempts can spiral down. It was once, like IBM, a dominant hardware maker before falling on hard times. It sold part of its business to Microsoft – one of Ballmer’s bad deals – and shares in the rest now trade at just 6% of their market high in 2000. Yahoo is another tale of woe. The Internet giant’s main business lost almost all of its value during a 10-year period before it was sold to Verizon.

Krishna has to push to be in Microsoft’s camp, but he’s got his work cut out for him.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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