IBM Cannot Grow Any More

IBM management may have decided to make the company smaller, after quarterly revenue that dropped year-over-year in the first quarter. Rumors have IBM selling its server business to Lenovo, the firm that bought its PC division in 2005.

In the most recently reported quarter, IBM’s revenue was down 5% to $23.4 billion. To make matters worse, IBM’s revenue dropped at each of its four operating divisions, and in its Systems and Technology group, which houses its hardware operations, revenue dropped 17%. Net income for the whole company rose only rose 3% to $3 billion.

IBM has most of the hallmarks of aging public companies that have lost their capacity to expand except through M&A activity. It shares these characteristics with other very old American companies such as Procter & Gamble Co. (NYSE: PG) and AT&T Inc. (NYSE: T). Each faces too much competition and has shown no evidence to can improve its position against most rivals.

IBM’s revenue last year was barely better than in 2008, before the recession. And revenue has risen less than 9% since 2004 — barely a percentage point each year. Profits have improved, but mostly due to cost cutting.

IBM’s struggle to add sales comes from two sources, although it is hard to say which has been more damaging. The first is that the competition for most of its products and services includes other very big multinationals like SAP, Oracle Corp. (NASDAQ: ORCL), Microsoft Corp. (NASDAQ: MSFT) and Accenture PLC (NYSE: ACN). In sum, they have flanked IBM, at least to the extent that they siphon off enough of IBM’s potential clients to keep the company from rapid expansion. The other problem IBM has is one of innovation. Innovation is a marker of rapid growth in the technology business. IBM has been unable to use advances in products or services to create the kind of expansion that the most successful tech companies have.

Ultimately, there is nothing wrong with IBM’s revenue flatline. Earnings can continue to rise due to judicious control of expenses. The value of the firm’s shares can be helped by a high dividend and share buybacks. But that is all the leverage IBM has to impress investors.