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Dragged-out Lenovo server deal whacks IBM's earnings for 2013?

Big Blue downshifts expectations, but doesn't

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IBM has never admitted that it has been trying to sell its System x and BladeCenter server business to Chinese PC and system maker Lenovo, which also took its venerable and usually unprofitable PC business over at the end of 2004.

But in a conference call with Wall Street analysts going over Big Blue's second quarter financial results, CFO Mark Loughridge said that a "big divestiture" it had expected to close this year and delivering a gain of 45 cents per share would very likely not materialize until next year.

"We are still in active discussions," Loughridge explained without getting into any specifics about what business it was trying to sell off or who it had pursued as a buyer. "We are not going to rush an M&A or divestiture just to close in 2013," he added.

During the question and answer session, Loughridge also said that IBM was looking to sell off other businesses and would add those gains to its 2015 Road Map, which is to bring in at least $20 of operational earnings per share as 2015 comes to a close.

This is the roadmap that prior chairman and CEO Sam Palmisano set before he stepped down and it is the cross that current chairman and CEO Ginni Rometty has to bear, come hell or high water.

At a mere 45 cents per share on an operating basis, whatever that big divestiture is would only bring in about $765m to the bottom line. These seems kind of small for a System x and BladeCenter server business that was rumored to be on the block to Lenovo for between $5bn and $6bn when it was picking up steam as April came to a close and that generated $5.6bn in revenues for Big Blue in 2012 according to the box counters at Gartner. Then the deal stalled, apparently over price according to rumors, but who knows. Neither IBM nor Lenovo have publicly confirmed they were in talks.

Through some kind of bizzarroworld logic that Wall Street almost certainly will not swallow, Loughridge said that IBM was taking its operational earnings per share guidance down to a $16.25 baseline because of the divestiture deal being pushed out.

But then Loughridge explained that the workforce rebalancing in the second quarter, where thousands of IBMers were laid off at the cost of $1bn, would help boost operating EPS by 20 cents per share in the second half. And presumably because IBM is very confident that it can close that "big divesture" in 2014, then Wall Street should count that in the operational EPS guidance for 2013. So, in a way, it was raising its 2013 EPS guidance by 20 cents from $16.70 to $16.90.

See, everything is OK. Move along now.

Toni Sacconaghi, the tech analyst at Sanford Bernstein and one of the smart people on Wall Street that can and does do the math, pointed out that in the past, IBM did not exclude workforce rebalancing from its EPS guidance, which was a 65 cent hit in the second quarter, but now IBM was asking for this to be excluded.

Loughridge danced around for several minutes, twisting himself in knots explaining, and El Reg is still not buying it. The basic argument was that IBM always had divestitures to offset layoffs, we think. But unless there are contracts that have been signed for this "big divestiture" and IBM is absolutely sure it can close the deal, it should not be behaving as if it has. Period.

In fact, the whole shift to operational earnings per share as opposed to actual earnings per share that Palmisano and his team shifted to as part of this 2015 Road Map was somewhat dubious. OK, correction. It was absolutely dubious.

The bottom line of real net income and real earnings per share is what really counts, particularly when a big company like IBM is buying and selling bits of itself all the time and laying off employees as well. These are not one-time events for Big Blue, but rather a way of life. ®

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