IBM, up 6% in July, was one of the Dow's best performers last month — thanks to a better-than-expected second quarter earnings report and the closing of its $34 billion acquisition of Red Hat, an open-source enterprise software maker.
Seeing more upside, Morgan Stanley resumed its coverage of IBM at an overweight rating and $170 price target on Thursday. The analyst argues that investors are missing the recent acceleration in IBM's core revenues, which they believe should be propelled further by the Red Hat deal.
But Steve Weiss of Short Hills Capital Partners, who sold his IBM shares in May after not seeing the revenue growth he had hoped for, remains bearish.
"I'm not happy with the Red Hat acquisition," he said on Thursday's "Halftime Report." He would prefer "if [IBM] were integrating Red Hat instead of leaving it out there as a stand-alone company," although he conceded the integration process could cause the combined company to "lose some of their customers."
Weiss also thinks the Red Hat acquisition, rather than being a great opportunity, reflects the poor decision making of IBM's longtime CEO Ginni Rometty, who he remains critical of.
"I'd much rather see a new CEO. She's been there for a very long time. For the board to let this CEO, who's watched the stock go down by nearly 50% while the market's doubled, to let her go out for a highly leveraged company at this point and spend $34 billion on an acquisition — you should replace the entire board. So that's why I'm not involved."
On the other hand, the Red Hat acquisition is "exactly why" Pete Najarian, co-founder of Investitute.com, added more to his existing IBM position on Thursday. He made the move after seeing bullish options investors rolling up their September 150 strike calls into the October 155 strike calls. But instead of getting into the calls he added stock because, as he said, "I'm a believer. I think they're a disruptor, Red Hat. I think they are going to absolutely eventually be a monster."
Though Najarian shares Weiss' concerns about Rometty, he thinks the Red Hat acquisition can solve that problem too, in the form of their CEO Jim Whitehurst.
To Weiss' point about the lackluster board, Najarian said, "I don't disagree about replacing some of the members of the board. Look at the performance level that Ginni's had since she's been there — not that great… But at some point in time who do you think will be selected as the CEO to replace her? Jim Whitehurst, who is an absolute pioneer and one of the best leaders in all of technology stocks." So far the companies have said Whitehurst will join IBM's senior management team and report to Rometty.
Can a change in leadership, if it comes, change the company's overall culture? Weiss thinks that will eventually be necessary in order to address the deeper problems he sees at IBM outside the Red Hat deal, observing, "You've never seen such [inefficiency], a culture that nobody wants to be there. They all see things wrong. Everybody has their resume out."
The picture isn't as bleak according to Shannon Saccocia, Chief Investment Officer at Boston Private, who also owns the stock. Saccocia draws a potential parallel to Microsoft's organizational improvements made under current CEO Satya Nadella. Acknowledging the "need for a cultural shift," she predicts, "it's possible. I also feel like, you see the shift that we've seen when Microsoft has been able to pivot their business and get good execution from a management perspective. If that creates an opportunity at IBM, I think there's a lot of upside in the stock."
Staking out the middle ground in this debate was Joe Terranova of Virtus Investment Partners, who would not buy IBM stock now but still approves of the Red Hat acquisition. In response to Saccocia's long-term bullishness, Terranova said, "They need to do a series of acquisitions to get to where you're talking about. They just have not done enough to diversify. Red Hat is a fantastic company, a great acquisition, but Red Hat alone will not get them to where they need to be."
Disclosure: Pete Najarian and Shannon Saccocia own shares of IBM.