Buffett's Investments: International Business Machines (IBM)

As it was widely believed, Buffett was not a huge fan of technology stocks and even was not involved in any tech stocks during the tech boom of 1990 – 2000s. However, he bought a massive 5.4% stake in IBM for $10.8 billion. Let’s find out why.

Rationality

IBM once was near bankruptcy in 1992. Lou Gerstner was then appointed as the CEO and he started with the corporate restructuring. He sold off the low-margin hardware technology assets and moved the business towards software and services. During his tenure, he also did share buybacks thereby reducing the outstanding shares by almost half in a span to 10 years.  He also raised the dividends by 136%. Then Sam Palmisano became the CEO in 2002 and he continued the business by keeping the focus on services and soft-off the personal computer business. 

Favorable long-term prospects

IT outsourcing made up 32% of IBMs revenues in the 2010s. It was the largest player globally and possessed moat due to high switching cost for its clients.

High profit margins, high ROE 

When Gersten became the CEO in 1994, the ROE of the company was 14% while by the time he retired in 2002, it reached 35%. It grew to a massive 62% during Palmisano’s tenure by 2012. The dramatic reduction in the number of shares outstanding through buybacks, led to the rise in ROE.