Lawsuit Aside, NSA Scandal Is Bad News for IBM

International Business Machines has had a rough couple of months, with the concerns over their business prospects in China causing share prices to drop. That gave way to a shareholder lawsuit early this past week.

The lawsuit alleges that IBM concealed the depth of the risks the NSA surveillance scandal posed to their business overseas, particularly in China. They go on to say IBM's direct cooperation with the NSA in certain surveillance schemes posed a "material risk" to sales. IBM's sales dropped 22% quarter over quarter in China, something the company directly attributed to the NSA backlash.

Shareholder lawsuits come and go, and I'm not going to pretend to have any particular insights on the merits of the case or whether the lawsuit in and of itself poses any real financial problem for IBM. Whether or not IBM "concealed" the risks of the NSA scandal, those risks are palpable and impacting the bottom line


The NSA problem
With fears of industrial espionage as well as government spying front page news across the globe, IBM is going to continue to face struggles overseas whether it cooperates directly with the NSA or not. The taint of being an American company, in this case, is the whole problem, and that means its being the scope of IBM's management to do very much about where it is based, nor the implications.

Worldwide, but particularly in countries like China, Brazil, and Germany where the scandal is getting the most coverage, NSA policy is directly threatening American companies' competitiveness in technology. Those buying anything that is security-sensitive are increasingly choosing European or Asian alternatives.

In the long run, the only thing that's going to end this is wholesale policy reforms, and so far politicians haven't made more than a cursory effort to touch the matter. In all likelihood it's going to take years to resolve this. That means a lot of lobbying from both civil liberties groups and the companies affected, which we're already seeing in the form of public calls for reform.

What this means for IBM
IBM makes great business solutions and they're going to remain a top dog in the domestic IT market as a matter of course. The problem is that the US market is already pretty mature, and their growth was supposed to come from overseas.

Still, floating near its 52-week lows one might be forgiven for seeing IBM as a buy at these levels, something to sit on and wait for the rebound. It's hard not to be sympathetic to that position when the company is a world-class one like IBM. With $36 billion in debt and the NSA scandal likely to be a very long-term drag this may be a time to wait and see if there's a cheaper entry point in the future. Either way, stopping the bleeding on overseas sales is going to take a while, so this is something you'd buy for the long term.

Then there was Siemens
But IBM's troubles may be other companies' gains. Those companies that are ditching IBM because of the NSA are probably not just putting their buys on hold, and are no doubt looking for a (preferably not-American) replacement.

Siemens AG springs immediately to mind as a company comparable to IBM in size, focus, and product quality. Even more appealingly, it's German and therefore has the inside track across the EU for replacing IBM in security-sensitive applications. If they can also use IBM's stumble to grow their business in China, so much the better.

Siemens boasts a better price/book ratio and was already growing at a healthy clip, one that should be even healthier with IBM no longer in the mix for certain contracts. With its history of dividends and its broad international appeal there was already a lot to like about Siemens, and there's even more to like now.

Final Foolish thoughts
IBM isn't going anywhere, but its competitiveness is stunted internationally and likely for years to come. Because of this, companies like Siemens should continue to make inroads in the fast-growing overseas markets, making it the place to be in the near term.

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The article Lawsuit Aside, NSA Scandal Is Bad News for IBM originally appeared on Fool.com.

Fool contributor Jason Ditz has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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