Lou Gerstner wrote, "People truly do what you inspect, not what you expect." … Lest we forget, these "inspection pages" exist because chief executives are "people" too.
Arvind Krishna: 2020-21 Shareholder Returns and Risk
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Published April 11, 2022
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Arvind Krishna's 2020-21 Shareholder Returns and Risk
- Evaluating Arvind Krishna's 2020-21 Shareholder Returns
- IBM Shareholder Trust and Transparency
- Arvind Krishna's 2020-21 Shareholder Returns by the Numbers
- Evaluating Arvind Krishna's 2020-21 Shareholder Risk
- Arvind Krishna's 2020-21 Shareholder Risk by the Numbers
Evaluating Arvind Krishna's 2020-21 Shareholder Returns
What were Arvind Krishna's second-year, 2020-21 shareholder returns—including dividends? IBM stock—including dividends—was up 7.19% over the two-years while the Dow Jones Industrial Average (DJIA) was up 15.20%, and a large company stock index fund was up 23.45%. Investors could have received spectacular returns with less risk and lower costs in indexed mutual funds. So much for Dividend Aristocrats, eh?
Unfortunately, to discover this information, an IBM shareholder still has to turn to the very last few pages of IBM's144-page Annual Report--a tradition started by Samuel J. Palmisano's team in his 2006 Annual Report. Although, the government requires this comparison chart, there must be no legal requirements on how "visible" this information must be for an investor.
Unfortunately, to discover this information, an IBM shareholder still has to turn to the very last few pages of IBM's144-page Annual Report--a tradition started by Samuel J. Palmisano's team in his 2006 Annual Report. Although, the government requires this comparison chart, there must be no legal requirements on how "visible" this information must be for an investor.
IBM Shareholder Trust and Transparency
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The IBM Chairman’s 2021 “Letter to Investors” covered:
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IBM's 2021 Annual Report reports the following returns 2016-21:
IBM Stock: 6% gain; S&P 500: 133% gain; S&P IT Index: 303% gain. |
It is the case of a chairman discussing "what" he or she is doing and not discussing if what he or she is doing is actually "working." Above is the chart that Arvind Krishna included in his 2021 Annual Report . . . Card.
This information is required by law, and it documents the corporation’s underperformance from 2016 to 2021. It shows a shareholder’s return on a $100 dollar investment in IBM common stock with all dividends reinvested. IBM's returns are the solid blue flatline. This chart was on page 136 of the company’s 144-page report . . . as far from the "Letter to Investors" as possible.
This is the equivalent of a salesman withholding his end-of-year attainment to the last chart in a hundred-chart PowerPoint presentation—only revealing that he failed to make quota after his management team had fallen into a deep stupor of boredom.
This is not good form from a corporation that claims it can be trusted to be transparent, and that it wants to build confidence in its leadership and their ethical standards.
Great leaders of great corporations address their issues: They do not bury them.
This is not good form from a corporation that claims it can be trusted to be transparent, and that it wants to build confidence in its leadership and their ethical standards.
Great leaders of great corporations address their issues: They do not bury them.
Arvind Krishna's 2020-21 Shareholder Returns by the Numbers
- Arvind Krishna 2020-21 Shareholder Returns: Compound Annual Growth Rate (CAGR)
- A $1,000 investment in IBM at the end of 2019 yielded a 7.2% CAGR.
- A similar investment in the Dow Jones Industrial Average yielded a 15.2% CAGR.
- A similar investment in a Large Company Index fund yielded a 23.45% CAGR.
- Krishna & Rometty 2011–21 Shareholder Returns
- A $1,000 investment in IBM at the end of 2011 yielded a .91% CAGR.
- A similar investment in the Dow Jones Industrial average yielded a 14.21% CAGR.
- A similar investment in a Large Company Index fund yielded a 16.55% CAGR.
- Krishna, Rometty, Palmisano & Gerstner 1999–2021 Shareholder Returns:
- A $1,000 investment in IBM at the end of 1998 yielded a 4.12% CAGR.
- A similar investment in a Large Company Index fund yielded a 8.09% CAGR.
- A similar investment in the Dow Jones Industrial average yielded a 8.66% CAGR.
- Generally speaking, in the first decade IBM underperformed index funds but were positive returns until Virginia (Ginni) M. Rometty took charge, then the stock consistently underperformed lower-risk, index investments mostly returning negative numbers.
Evaluating Arvind Krishna's 2020-21 Shareholder Risk
An intangible asset is something that, if dropped on your toe, doesn’t leave a mark. It is ethereal, and its value is open to personal interpretation, imagination, and creative thinking. For the purposes of this article, intangible assets are presented in two ways: first, the goodwill that arises directly from an acquisition; and second, all other intangible assets—patents, brand image, customer relations, non-binding contracts, strategic alliances, or others (from IBM's Annual Reports).
Goodwill is the difference between the full amount paid for an acquisition less all other tangible and intangible assets. For instance, in its 2003 annual report, IBM documented the 2002 acquisition of PricewaterhouseCoopers Consulting (PwCC) for $3.89 billion. Of the purchase price, IBM estimated that PwCC had $.32 billion in tangible assets (current and fixed assets — chairs, desks, computers, buildings, etc. — less current and non-current liabilities), and $.41 billion in “other” intangible assets (strategic alliances, client relationships, and customer contracts). The remaining $3.16 billion — 81% of the purchase price — was listed as goodwill: specifically, the value of the acquired assembled workforce, synergies gained from combining PwCC and IBM, and the premium paid to gain control.
Of the $91.3 billion paid for its 207 acquisitions and resulting goodwill of $64.5 billion, $55.6 billion is still carried today as goodwill—more than 60% of all acquisition dollars. This goodwill carries no inherent value and, in a worst-case scenario such as bankruptcy, it would have little or no monetary value.
Therefore, an increasing percentage of goodwill increases shareholder risk. These charts start in 2001 because that is when an accounting change was made that allows a company to carry goodwill … effectively forever (writing cynically but close to the truth).
Goodwill is the difference between the full amount paid for an acquisition less all other tangible and intangible assets. For instance, in its 2003 annual report, IBM documented the 2002 acquisition of PricewaterhouseCoopers Consulting (PwCC) for $3.89 billion. Of the purchase price, IBM estimated that PwCC had $.32 billion in tangible assets (current and fixed assets — chairs, desks, computers, buildings, etc. — less current and non-current liabilities), and $.41 billion in “other” intangible assets (strategic alliances, client relationships, and customer contracts). The remaining $3.16 billion — 81% of the purchase price — was listed as goodwill: specifically, the value of the acquired assembled workforce, synergies gained from combining PwCC and IBM, and the premium paid to gain control.
Of the $91.3 billion paid for its 207 acquisitions and resulting goodwill of $64.5 billion, $55.6 billion is still carried today as goodwill—more than 60% of all acquisition dollars. This goodwill carries no inherent value and, in a worst-case scenario such as bankruptcy, it would have little or no monetary value.
Therefore, an increasing percentage of goodwill increases shareholder risk. These charts start in 2001 because that is when an accounting change was made that allows a company to carry goodwill … effectively forever (writing cynically but close to the truth).
Arvind Krishna's 2020-21 Shareholder Risk by the Numbers
- Arvind Krishna's 2020-21 Shareholder Risk
- Shareholder Risk increased in 2021 as intangible assets surpassed 50% of total assets because of the Kyndryl divestiture—52% in the chart below reflects the appropriate percentage.
- Krishna & Rometty 2011–21 Shareholder Risk
- From 2011 through 2021, the percentage of goodwill + other intangible assets rose from 25% to 52%, The Red Hat acquisition resulted in a large increase not only in goodwill but other intangible assets.
- Krishna, Rometty, Palmisano & Gerstner 2001–21 Shareholder Risk:
- Goodwill accumulated through 201 acquisitions at a total cost of $91.3 billion drove shareholder equity less goodwill into the red in 2008 and significantly lower since, by increasing goodwill and other intangible assets.
- Krishna, Rometty, Palmisano & Gerstner 2001–21 Shareholder Risk:
- The next two charts visualize the growth of goodwill only and visualizes that growth's historical importance.
- This first chart documents the growth and percentage of goodwill as it reaches 42% of total assets.
- This second chart displays how far back into the past a researcher must dig to find a point in time when the corporation held a similar amount of goodwill on the books: Around the time that the C-T-R Company was renamed International Business Machines. In the 20th Century, it took Tom Watson Sr. forty-two years to drive goodwill to zero.
- How long will it take in the 21st Century?
