Many investors are holding their breath even as they hold out plenty of hope looking at the recently announced deal between Apple and IBM.
The upside, many say, is unlimited because it's such a brilliant move.
In fact, the deal reeks of desperation and unprecedented weakness.
We've seen this playbook before...
We've Seen These Mergers Before
Today's computer market has some similarities to yesterday's airline industry. With relentless competition and enormous downward price pressures, the only way to survive was to team up with rivals to improve economies of scale and broaden product outlets (In the case of airlines, acquiring flight routes and gates).
Over the past 12 years, we've seen a series of bankruptcies and mergers that have taken the airline industry down from 10 major U.S. carriers to only four. At the same time, complaints have more than doubled about everything from reservation systems to baggage and on-time performance. One cost of consolidation has clearly been customer service, and despite expanded economies of scale, less competition has only driven prices higher.
Another "merger to safety" is in the auto supplier market.
Since 2006, we've seen a flurry of activity as formerly competitive companies have teamed up to combat more cost-effective foreign suppliers. According to PWC, there have been 1,944 deals since '06, with 27 of the world's largest suppliers seeking consolidation here in the United States. They are, in effect, closing ranks against foreign competition.
IBM Is Apple's Backup Plan
If you think about this for a minute, what I'm saying makes a lot of sense: the Apple and IBM teaming strategy is a move towards mutual safety, not growth.
Take smartphones, for example.
According to International Data Corporation, last year the industry shipped more than one billion units for the first time. That's up 38.4% from 2012 and represents a doubling of smartphone volume in just two years.
Much of the hope driving this deal is that Apple and IBM will be able to tap new "synergies" that allow Apple access to IBM's business markets, and give IBM access to Apple's devices and cloud services.
Unfortunately, "synergy" is corporate buzz speak used when someone is trying to explain why a particular plan or undertaking will work when the data suggests it won't, or that there's a snowball's chance in hell of success.
When you break down the composition and growth of the smartphone devices shipped by operating system, you can see very clearly that the battle is all but over.
Like it or not, Google's Android operating system holds a commanding lead and now accounts for a staggering 80% of all worldwide smartphone operating systems shipped. The majority of gains have come directly at Apple's expense.
I think Tim Cook and company realize that they're in deep trouble here against the likes of Google, Amazon (which recently introduced a smartphone), and newly emerging Asian power players like China's Xiaomi. And I believe that they are making the only move available to them to survive the relentless onslaught of competitors, by making a bid to become an enterprise player.
If there is a true stroke of brilliance to the Apple IBM tie-up, I think it's that Apple is undertaking this deal as insurance against further losses to Droid operating systems and a potential collapse in its lucrative phone and tablet revenue. At this stage of the game, it accounts for nearly 75% of total revenue.
Why IBM Moved on the Deal, and the Overall Investor Play
IBM's upside in the deal is a little more speculative. No doubt the hope is that the company will profit for having introduced enterprise-capable Apple products to their customer base. But what IBM is really hoping to do is reposition itself as a major player in the cloud-computing era, a move that it's largely missed to date. So they have to try... or die.
So how do you play this?
I don't believe either stock is on deathwatch yet. But, if we look to the history books, that time may not be far away either.
So if you're already long on one or both stocks, I'd be running some pretty tight trailing stops. Doing so will allow you to tap into the "buy and hope" strategy that is central to this deal for as long as the markets continue to rise while also safely guarding your profits from a reversal down the line.
When that happens is anybody's guess. But what will drive the reversal isn't. All it will take is the first earnings reports from either company that reference subpar partnership sales.
Now, where's my Blackberry?