Generating Higher Value at IBM (A)
HBS Case No. 215-058
Posted: 11 Nov 2015
Date Written: June 29, 2015
This case analyzes IBM's financial performance and its capital allocation decisions over a 10-year period from 2004 to 2013, during which IBM returned more than $140 billion to shareholders through a combination of dividends and share repurchases. During this time, CEO Sam Palmisano's created, announced, and then regularly updated a long-term financial "roadmap" as part of the firm's strategic transformation. The roadmap showed both a destination (a target EPS number) and a detailed path to that destination in terms of revenue growth, margin expansion, and share repurchases. After successfully achieving its first roadmap, the firm announced a second 5-year roadmap known as the "2015 EPS roadmap". The case is set in May 2014, just after IBM's annual investor briefing. Despite more than 10 years of strong financial performance, IBM reported relatively weak financial results in the first quarter of 2014. Sophia Johnson, an equity analyst, must decide whether to revise her investment recommendation based on what she heard that day.
This comprehensive case works well in a variety of courses ranging from introductory financial accounting and corporate finance courses to more advanced accounting and finance courses. The case is designed to teach basic financial statement analysis (sources and uses of cash, DuPont formula, financial ratio analysis, etc.) in a unique and interesting setting. It is also designed to illustrate modern payout policy and the various mechanisms for distributing cash to shareholders. A third objective is to explore the advantages and disadvantages of providing long-term earnings guidance. Finally, the case illustrates how publicly stated, long-term financial goals can be an integral part of a corporate transformation program.
Keywords: Change management, Dividends, Share Repurchases, Earnings Forecasting, Finance, Financial ratios, Financial statements; Financial strategy; Leadership; Transformations
JEL Classification: G35, G32, G17
Suggested Citation: Suggested Citation