Q & A – Case 1: Group6

1. Why did IBM create and publicly announce the 2010 EPS Roadmap in May 2007?

Palmisanao said: “The market didn’t see all the great things we were doing” – “We gave investors annual
outlook, and we gave them (quarterly) earnings. You have to give them something – they’re the owners” –
“…come up with something longer term that gave investors enough information…”

They had to become: 1) transparent with their strategies 2) where and how IBM is heading to; there were
two methods: 1) generating higher value at IBM quarterly and annual updates 2) EPS Roadmap

The reason behind this publicly announcement in May 2007 were:

 Gain investors to improve cash position, profitability and market share;

 Returning value to their shareholders
 Gave insights to the public or to the financial market and even to their competitors on what to
expect on IBM’s long-term financial goal and how they will achieve it

The main problem was that the orientation around a 90-day outlook was distorting management
practice “not every quarter is going to be perfect”. Through a publicly announce, its outlook would have
been longer, IBM was able to make long-term decisions that would not affect, in the short term,
important upheavals in the stock market. Thanks to this move IBM was able to change its business
model, investing in data management, IT, software and services.

2. How would you assess IBM’s financial performance both before (from 2004-2006) and after (from
2007-2009) announcing the 2010 roadmap? Analyze case Exhibits 1,2, and 3 for levels, trends,
changes in financial performance. Hint: what has happened to IBM’s ROE (Return on equity) and
cash flow over the 10 years? Why and how did they change?

In contrast to the growth and profits during the 1960s and 1970s, IBM entered a period of dramatic change
during 1980s and 1990s: revenue fell from a high of $69 billion in 1990 to $63 billion in 1993. In 2000s,
during these years, the company leadership was led by S.J Palmisano who dramatically increase the
performance of IBM: revenues growth from $81.2 billion in 2002 to $106.9 in 2011; net income from
$24,905 million in 2004-2006 to $99,952 million in 2007-13; Cash flow from $732 million in 2004-2006 to
$2697 million in 2007-13; ROE increase from 6,7% in 2004 to 13.1% in 2013. These outstanding
performances was reached mainly thanks to a strategic vision by IBM that understand they needed to
change their business, keeping the ones which were growing and disinvesting the ones which were
decreasing. If we look at “operating activities”, we can notice how much the voices “Net income” and
“Depreciation & Amortization” had grown, sigh of huge effort in investing in new growing businesses.

3. Was the 2010 Roadmap successful?

It was a successful case, IBM was able to meet its target of $11 EPS, earning trust and respect in the
market, making it an effective strategy to use and meet the EPS target. Besides, revenues and net income
went up.
4. How did the 2015 Roadmap differ from the 2010 Roadmap? Has the 2015 Roadmap been successful
so far (up to May 2014)?

2010 Roadmap 2015 Roadmap

 IBM borrowed $11,5B to buy 119M shares
from investment banks (accelerated share
repurchases) at $105 per share
 Revenue went up to $95,5B in 2009
 Net income also went up to $13,4B
 EPS target was achieved at $11
 EPS increased due to share repurchases
 IBM paid more for dividends and share
repurchases
 Used the operating (non-GAAP) EPS
reporting system
 Target operating RPS: $20+
 EPS went down in 2014. Hence was not a
complete success

5. What should CEO Rometty and CFO Schroeter do as of May 2014: affirm the 2015 EPS Roadmap (and
the $20 target), adjust it, or abandon it?

The CEO and CFO should have abandoned it. The path to $20 was no longer feasible.

 Revenue growth, margin expansion, share repurchases are all low beyond from it has been
forecasted
 Stock price was down
 IBM reported revenue decrease, net income & EPS were down for the 3rd quarter if 2014

6. What should Sofia Johnson recommend to her clients – buy, hold or sell IBM shares?

 Sofia Johnson should have recommended to her client to sell them as $20 EPS was no longer
possible, stock price was low and revenues, net income & EPS were also down
 IBM’s management gives more focus on earnings rather than investing for the future
 They prioritized profits over growth