Why Buffett Quit IBM and CEO Rometty

By Douglas A. McIntyre Updated Jan 12, 3:22AM EST · Published Feb 15, 6:25AM EST

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Why Buffett Quit IBM and CEO Rometty — © Thinkstock

Warren Buffett’s bet on International Business Machines Corp. (NYSE: IBM), which he has almost completely abandoned, was based on his belief that its chief executive officer, Ginni Rometty, could turn around the floundering tech company. When it was clear she could not, Buffett sold virtually his entire holding in the stock.

IBM’s last quarterly report was released after Buffett made his move. However, earnings reports from last year showed the writing was on the wall. The IBM turnaround had not stalled. It never existed. Buffett cut his investment in IBM to about 2 million shares in the final quarter of 2017.

Over the course of the year, IBM shares dropped more than 8% while the while the S&P 500 rose 29%. From the start of 2013 through the end of 2017, the figures were grimmer. IBM’s shares fell 21% over the period, while the S&P 500 was higher by 126%.

The ongoing drop in IBM sales, which ended in the last quarter of 2017, almost certainly was not the only reason Buffett sold. Rometty made a large bet on cloud computing. A number of other large tech companies, including Amazon and Microsoft, have made similar wagers, and theirs were more successful.

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IBM collected some of its cloud and artificial intelligence businesses under an odd umbrella called Watson. Thomas Watson ran IBM from 1914 to 1956, and Thomas Watson Jr. ran the company from 1956 to 1971. IBM never fully described what the Watson operations were. However, the company issued press release after press release about the partnerships IBM made based on alliances formed, mostly without dollar figures attached to them. Among the most recent:

Maersk and IBM today (January 16) announced their intent to establish a joint venture to provide more efficient and secure methods for conducting global trade using blockchain technology.

The aim of the new company will be to offer a jointly developed global trade digitization platform built on open standards and designed for use by the entire global shipping ecosystem. It will address the need to provide more transparency and simplicity in the movement of goods across borders and trading zones.

Watson also became the face of IBM’s marketing efforts for the entire company.

In the fourth quarter, for the unit of IBM that includes its “strategic initiatives,” the future of the company, the results were not impressive:

Technology Services & Cloud Platforms (includes infrastructure services, technical support services and integration software) — revenues of $9.2 billion, down 1 percent (down 4 percent adjusting for currency). Strategic imperatives revenue grew 15 percent, driven by hybrid cloud services, security and mobile.

IBM’s stock did poorly after the most recent earnings release, down about 18% to $155, compared to a drop of 7% in the S&P 500.

Buffett has moved out of his IBM position, an acknowledgment that the world’s best-known investor knew he had made a mistake.

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.