Warren Buffett says he sold a third of Berkshire’s IBM stake, and IBM shares drop
New York /Seattle — Warren Buffett is acknowledging what many investors have already realised: IBM’s long-promised reinvention is slow, painful and nowhere near close to the end.
In an interview with CNBC, the billionaire chairperson and CEO of Berkshire Hathaway disclosed that he sold about a third of the firm’s investment in the computer-services giant during the first half of 2017. Before the sales, Berkshire held about 81-million shares. The news led IBM to tumble as much as 3.8% to $153.00 Friday in New York, its lowest intraday price since November.
IBM has been frustrating investors for years, reporting in April its 20th straight quarterly revenue decline. The company once synonymous with mainframe innovations has been slow to adopt cloud-related technologies and has had to play catch-up to offer computing and other software and services delivered over the internet.
After a run of three straight annual declines, IBM’s shares gained about 21% in 2016 but were still more than 25% lower than the company’s 10-year peak in 2013. The shares have lagged behind technology peers and the S&P 500 Index in 2017.
Berkshire started building its IBM stake in 2011, and eventually became the company’s largest shareholder, with an investment valued at almost $13bn. With his initial interest, Buffett was betting on IBM’s expertise in IT services to drive growth in emerging markets.
At the time, then CEO Sam Palmisano, was steering Big Blue toward services and software and away from hardware. To achieve that, he’d been making aggressive stock buybacks, spending more than $15bn annually on repurchases during his last two years at the company. IBM abandoned that goal in 2014 under CEO Ginni Rometty, sending shares spiraling.
Rometty, who took over in 2012, has slowed the pace of share buybacks in recent years, spending instead on acquisitions to bolster growth areas. While IBM is working to become a cloud purveyor, its new services and software haven’t been growing fast enough to counter the slowdown in some of its major business lines, such as traditional IT services, which have been declining quickly.
"I don’t value IBM the same way that I did six years ago when I started buying," Buffett told CNBC. "I’ve revalued it somewhat downward."
Without the Buffett buffer, IBM may receive more scrutiny around when it will reach that inflection point.
"This may put some pressure on management to be more aggressive in returning to growth," Anurag Rana, a Bloomberg Intelligence analyst, said in an e-mail. Other investors "may get impatient".
Thousands of Berkshire investors were set to gather in Nebraska for Berkshire’s annual meeting on Saturday. Buffett, 86, and vice-chairperson Charles Munger, who regularly field questions from shareholders at the event, can expect to be quizzed about IBM — as they have been in the past.
Representatives of Berkshire and IBM did not respond to requests for comment after regular business hours.
While Buffett is known for sticking with stocks like Coca-Cola for decades, he is not wedded to old favourites when circumstances change. In recent years, he got rid of most of Berkshire’s stock in Procter & Gamble and Wal-Mart. He cited the competition facing Wal-Mart from online rivals such as Amazon.com, while pointing in 2012 to disappointing results at Procter.
The billionaire also exited most of its stake in Graham Holdings after that company sold the Washington Post newspaper. Buffett was previously on the board of the Washington Post Co, and the stock was one of his best investments.
Berkshire stressed in its annual report in February that it was willing to exit long-time holdings in its stock portfolio, contrasting that flexibility with Buffett’s commitment to permanently hold most companies that he acquires outright.
"It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20-20 vision)," Buffett wrote in the letter. "But we have made no commitment that Berkshire will hold any of its marketable securities forever."