International Business Machines Corp (IBM.N) is concerned about a possible attack by prominent activist hedge funds, and is working with two investment banks to formulate a defense plan, according to the people, who declined to be identified.
When asked for comment, IBM said: "IBM is continuing to execute on our strategy - making investments in growth areas such as analytics and cloud, reinventing our core franchises, and returning capital to shareholders. We are managing the company for the long term."
The storied American technology giant, worth $157 billion today, has struggled to transform itself from a low-margin hardware maker into a cloud-based software and services company.
When Virginia Rometty took over as chief executive at the start of 2012, Wall Street was hopeful that she would be able to kickstart growth. Analysts praised the former systems engineer for her strategic thinking in guiding IBM's acquisition of PricewaterhouseCoopers Coopers Consulting in 2002.
As revenues continued to decline year on year, however, some IBM investors began to lose confidence management, according to people familiar with the matter. Last year, IBM withdrew its long-term operating earnings target for 2015, and shares of Big Blue are now down about 25 percent from a March 2013 high.
Some IBM shareholders are trying to persuade prominent activists to build positions in the company and come up with ways to boost value, people familiar with the matter said.
Pershing Square and ValueAct Capital both looked at IBM in recent months, but passed on making a move, the people said. A spokesman for Pershing Square declined to comment. ValueAct did not immediately respond to a request for comment.
Part of the activist funds' concern was that IBM, whose stock is trading at around $159, is too expensive and the company's structural problems could not be fixed easily, according to several sources.
Another reason, the sources said, is that some investors feel Rometty is doing a good job coping with a tough situation, so she does not fit the role of an underperforming CEO that many activists look for when they make a move.
Once best-known for mainframe computers, IBM has been pivoting to security software and cloud services, but growth in those areas has not fully offset weakness elsewhere. Revenue in 2014 fell to $93 billion, from $107 billion in 2011.
The company, which earns more than two-thirds of its revenue outside of the United States, has been hit hard by the strong dollar and it divested some $7 billion last year. Adjusted for these two factors, revenues were down roughly 1 percent last year, the company noted. Also the company posted $21 billion in pre-tax profit from continuing operations in 2014.
IBM in said in February it is targeting $40 billion annual revenue from the cloud, big data, security and other areas by 2018. It has divested about $7 billion in commoditized IT assets, such as call centers and chip manufacturing, and announced multibillion dollar investments in cloud data centers and its Watson supercomputer system.
NO DISCUSSIONS AT PRESENT
It is not unusual for investors and consultants to try and shop companies to activists. At a time when stock picking is becoming tougher, pressuring companies to buy back shares, spin off units, or replace a CEO can be appealing.
There are currently no discussions between IBM and any activist investor, two of the sources said. Still, the company's advisers are educating IBM's board on how to handle an activist and to conduct a strategic alternative analysis, they said.
Warren Buffett's Berkshire Hathaway Inc (BRKa.N) is a top investor in IBM. With Buffett often siding with management, his presence may make it less appealing for activists to jump in.
"These days no company is safe from an activist looking at it," said Damien Park, who works with large corporations as head of consulting group Hedge Fund Solutions.
"Everyone is on the list and either you already have been approached by an activist or you will be approached by an activist."
The $20 billion Pershing Square helped breathe new life into Canada's No.2 railway, Canadian Pacific (CP.TO), and the $15 billion ValueAct helped engineer a leadership change at Microsoft Corp (MSFT.O).
ValueAct sits on the board of Microsoft, which competes with IBM in some markets. ValueAct may have faced a conflict of interest if it were to take action on IBM.
Other large technology companies that have come under attack from activists in recent years include Apple Inc (AAPL.O) and eBay Inc (EBAY.O), both targeted by Carl Icahn; Relational Investor LLC took aim at Hewlett-Packard Co (HPQ.N); and Elliott Management Corp is pressing EMC Corp (EMC.N) to spin off VMware Inc (VMW.N).
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