In 2002 former IBM chief executive 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 10-fold 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 more than a decade quantitative easing has created a world of ultra-low interest rates that benefited hi-tech, disruptive businesses, many of which prioritised rapid customer acquisition over profit.
Many of these growth stocks did extraordinarily well for a long time. Meanwhile, the market often undervalued businesses that had already built a strong customer base and which were profitable. The prospect of growth appealed more to investors than the fruits of past growth.
Inflation and rising interest rates have changed that. As quantitative easing transitions towards quantitative tightening, the era of cheap debt looks to be over. The cost of borrowing to build your customer base and scale is now becoming prohibitively high.
As a result, the market is reappraising successful older businesses – many of which have been quietly embracing digital technology to re-energise their propositions and reduce costs. These have gone largely unappreciated for too long, yet they are profitable and growing.
My colleagues hold shares in a remarkable number of businesses that have successfully reinvented themselves. Here are four examples – all listed in the UK and 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 behaviour and enabling them to reward good drivers seen to present less of an insurance risk.
LSEG
The London Stock Exchange was founded in 1801 and is another business that today makes the bulk of its money from data – 70% of its revenues comes from subscription-based services in data and analytics.
Digitisation of financial markets data is still in its early stages and presents a long-term opportunity as demand grows from banks, wealth managers and asset managers, among others. LSEG’s tentacles spread in many directions. It is even involved in open banking, helping financial institutions with secure account verification services for digital transactions.
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 word.
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 challenger 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.
The lesson for investors is that words like ‘edtech’ and ‘fintech’ are becoming irrelevant. 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 – and in particular the dividends they are capable of delivering.
Many of my colleagues are big fans of dancing elephants. Do you need to find some for your portfolio?
Paras Anand is chief investment officer of Artemis Investment Management. The views expressed above should not be taken as investment advice.