In 2002 former IBM CEO Louis Gerstner wrote a bestselling book, Who Says Elephants Can’t Dance? In it, he told how he turned around the fortunes of the one-time darling of Wall Street.
Gerstner took up the reins at IBM in April 1993. Three years earlier the company had enjoyed its most profitable year ever, but these were fast-changing times in the world of computers. At the point he arrived, the company had just lost $8bn – then the biggest loss in American corporate history. It was a lumbering elephant, dying on its feet.
Gerstner led an extraordinary turnaround that saw the share price increase tenfold in just six years. Today we may not think of IBM as in the same league as Apple or Microsoft, but it is a £112bn company that employs nearly 300,000 staff and is one of the businesses at the forefront of the AI revolution.
As well as demonstrating the fragility of market leadership, its story shows how companies thought moribund can be brought back to life. Elephants can dance, and smart investors should be alert to the fact – particularly now.
Tech-savvy
For over a decade, quantitative easing has created a world of ultra-low interest rates that benefited hi-tech, disruptive businesses, many of which prioritized rapid customer acquisition over profit.
These growth stocks did extraordinarily well for a long time. Meanwhile, the market often undervalued established businesses that had already built a strong customer base and which were profitable. The promise of rapid growth potential appealed more to investors than the fruits of past growth.
Inflation and rising interest rates have changed that. The era of cheap debt looks to be over and the market has begun reappraising these successful older businesses – many of which have been quietly embracing digital technology to re-energise their propositions. These have gone largely unappreciated for too long, yet they are profitable. And they are growing.
My colleagues hold shares in a remarkable number of businesses that have successfully reinvented themselves. Here are four examples – all with 19th-century roots but a determinedly modern approach.
RELX
RELX is a merger of British trade book and magazine publisher Reed International, which was founded in 1894, and Dutch scientific publisher Elsevier, which was founded in 1880. They merged in 1993. Today RELX is a major digital information and analytics company. Its customers – including governments, universities, insurance businesses, and law firms – span more than 180 countries.
A cutting-edge example of its products is in the area of telematics. If you have a young adult family member in their first years of car ownership you may have been tempted to have a box installed in their vehicle to send data to the insurer about their driving patterns. RELX-owned LexisNexis Risk Solutions collects and manages much of this data, helping insurers build an increasingly accurate picture of driver behavior and enabling them to reward good drivers seen to present less of an insurance risk.
Siemens
Siemens began life in 1847 as a telegraph business. By the 21st century, it had expanded into many different sectors and lost its way. Under new management over the last decade, the business has invested heavily in the energy sector, including the acquisition of Spain’s wind turbine manufacturing business, Gamesa. The company now is a world leader in electric grid upgrades, wind turbines, and factory automation. Yes, it still makes trains, which is low margin, cyclical, but the balance of the company has been successfully shifted over ten years and this is increasingly reflected in the share price which has risen from €94 last September (the time of the Gamesa acquisition) to c. €150 today.
Schneider
Schneider started in an iron foundry in Le Creusot, France in 1836, initially specializing in the production of steel, heavy machinery, and transportation equipment. Today its core business is energy management, with a smaller element of the business – worth around 23% in industrial automation. The company looks well placed to benefit from investment in transitioning to a more electric world.
Smiths Group
Founded in 1851, Smiths started out making precision watches for the Admiralty. Edmund Hillary wore one of its watches on the first successful ascent of Everest. Today the company is a multinational engineering business. Among its products are sensors – it manufactures a lot of the luggage-checking equipment used at airports around the world.
Pearson
Pearson morphed from construction into a publishing business in the 1920s. Today it is the world’s biggest education company. Education and training are ripe for disruption. Pearson has transitioned from printing books to developing online learning. It could one day become a serious challenge to traditional universities – it already offers degrees.
These are innovative businesses generating strong cashflows and sustainable dividends. Each has morphed, unnoticed by many, towards the new economy.
Technology is now an integral part of every company’s business, and many of our oldest listed companies are also the most technologically advanced in their niche areas.
These businesses might be unfashionable, but investors could come to appreciate their steady growth – particularly the dividends they can deliver.
Many of my colleagues are big fans of dancing elephants. Do you need to find some for your portfolio?
