May 7, 2014
The fur surrounding IBM (IBM) may be starting to fly faster. The doubt that began to shroud the company’s future took some form late last year when a well-known hedge fund executive publicly shorted the vendor’s shares in a bet against its ability to transition to the cloud, gained steam from what’s become a two-year-long revenue losing streak and now is fueled by some virulent buzz that big accounts are fleeing in droves and the company’s India operation is steeped in corruption. Whew.
Let’s backtrack: Last November, Stan Druckenmiller, Duquesne Family Office chairman and chief executive and Duquesne Capital Management founder, made news when he called IBM “old technology” and announced he was shorting the vendor’s stock, describing the move as “one of the more higher-probability shorts I have seen in years.”
Although most Wall Streeters still are long on IBM, the vendor hasn’t done much but cut costs to arrest its eight-quarter consecutive losing streak, last week posting a 4 percent year-over-year slide to $22.5 billion for Q1 2014 with net income tumbling 21 percent to 2.4 billion and EPS falling 15 percent to $2.29 a share. IBM’s shares, however, have risen nearly 7 percent in the past six months, no doubt heavily influenced by its uber-aggressive cost-cutting measures, so Druckenmiller’s bet may take a while to pay off, if even it does.
Now Alsin Capital Management investment adviser Arne Alsin has detailed more behind-the-scenes crumbling concrete in IBM’s foundation that frankly doesn’t sound too good.
In a SeekingAlpha.com column this week, Alsin, building on some earlier work by Robert Cringely, alleges a number of big-time IBM customers have abandoned the vendor in recent quarters, mostly over poor performance in fulfilling contracts, running lost revenue into the billions of dollars. Some of the heavyweights leaving the company include Disney, ING, Tata Motors, AstraZeneca and the National Football League (NFL), Alsin said. And, there’s also blown deals with Indiana, Pennsylvania and Texas state governments.
Alsin wrote that in Indiana, IBM breached an IT contract to upgrade the state’s welfare system technology, while Texas accused IBM of failing to execute an $864 million data center consolidation in a project that ran years behind schedule. Pennsylvania, meanwhile, claimed the vendor was $60 million over budget and nearly four years past the due date on a project that an outside reviewer termed “unreliable and full of bugs.”
IBM also reportedly is being sued for $2.5 billion by Iusacall, a telecommunications vendor based in Mexico, over a failed project.
Corruption in India?
But the kicker, according to Alsin, may be allegations of ethical wrongdoing at IBM’s India operations, home to its service operation and some 150,000 workers. Apparently, some internal documents were leaked highlighting fraud with IBM India, including outsourcing projects to relatives, top management lining their pockets with scammed money and contracts written with no plan to fulfill the requirements.
IBM top brass, including chief executive Ginni Rometty, evidently were apprised of the situation and immediately made three forays to purge the corruption, ultimately terminating three senior managers who forged customer purchase orders, firing 24 officials who created false orders and overstated revenue and showing the door to others for botching a $2.5 billion contract with Bharti Airtel, a top cellular provider in India and IBM’s biggest customer there.
One former IBM employee, as recounted by Alsin, posted a note:
In some deals, there would be line items like “Manage 50 UNIX servers” or “Maintain backups for 25 Windows servers,” with absolutely no accompanying detail. No backup schedules, no retention requirements, no up or downtime specifications, etc. The idea was that those details would be filled in later on, but often they never were. As you can imagine, this often became a recipe for chaos.
The upshot saw the firing of Jay Menon, Bharti’s chief executive, who apparently was in on the corruption, allegedly profiting from money earmarked for subcontractors. While Bharti never removed the contract from IBM it did pare it by one-third and attached strict markers to IBM’s performance going forward.
And, in a curious twist, IBM India managing director Shanker Annaswamy, who was at the center of the double-dealing and subsequently was moved out, now is back as a senior adviser to help IBM “steer through the crisis.”
So, just how deep do IBM’s troubles run? Amid the vendor’s determination to make its 2015 goal of $20 earnings per share, it’s becoming harder to see how IBM can get there other than scuffed up and badly bruised.
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