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IBM’s Acquisition Strategy

Posted on Wednesday, Jul 21st 2010

This week, IBM (NYSE:IBM) reported a mixed second quarter by beating bottom-line estimates but missing the top-line sales estimate. Earlier this month, Big Blue announced its plans to acquire BigFix, a network management and security specialist. In the recent quarter, IBM announced two more acquisitions: Cast Iron, a cloud computing integration company, and Coremetrics, a developer of business analytics software. Let’s take a closer look.

IBM has made a string of acquisitions in its key growth areas of Smarter Planet Initiatives, business analytics and cloud computing. This year, it acquired healthcare data management firm Initiate, network automation solution provider Intelliden, and B2B file sharing software maker Sterling Commerce. Sterling cost $1.4 billion and is IBM’s first acquisition over $1 billion since it acquired business analytics provider SPSS for $1.2 billion. Sterling will complement IBM’s efforts in the cloud computing market, which IBM expects to reach $3 billion in 2015.

IBM has been steadily building up its infrastructure software portfolio for a long time in areas that include security. Apart from BigFix, over the past year it acquired National Interest Security Company, which specializes in handling sensitive tech work for defense and security agencies, and Ounce Labs, which specializes in application security. To round out its portfolio in security and cloud computing, I think IBM should next acquire Qualys, the of security and the leading provider of on-demand vulnerability management and policy compliance solutions. Read my interview with Qualys CEO Philippe Courtot. Another fast-growing security firm is e-mail security provider Proofpoint, which itself has rolled up two startups. I recently interviewed its CEO, Gary Steele.

Let’s now take a look at IBM’s recent results. IBM reported second quarter revenue of $23.7 billion, up 2%. Net income increased 9% to $3.4 billion or $2.61 per share. Gross profit margin was 45.6% versus 45.5% last year and 43.6% last quarter. IBM ended the quarter with $12.2 billion of cash on hand and debt of $26.7 billion. The company returned $4.9 billion to shareholders through $0.8 billion in dividends and $4.1 billion of share repurchases. Q1 analysis is available here.

IBM said revenue from its growth markets jumped 14% and accounted for 20% of total revenue. Revenue in the Americas, IBM’s biggest market, increased 3%, while Europe, the Middle East, and Africa declined 6% and Asia increased 8%.

Total Global Services revenues increased 2% with Global Technology Services revenue up 1% to $9.2 billion and Global Business Services revenue up 3% to $4.5 billion. Revenue from the company’s Business Analytics operations within Global Business Services and Software increased 14%. Systems and Technology revenue was up 3% to $4 billion. Software revenue was up 2% to $5.3 billion with the company’s key middleware products, which include WebSphere, Information Management, Tivoli, and Lotus increasing 9% to $3.3 billion.

IBM signed services contracts totaling $12.3 billion, down 12% over the year and including fifteen services contracts greater than $100 million. Based on its performance, IBM has raised its 2010 per-share profit target to at least $11.25 from the previous outlook of at least $11.20. Analysts expect full-year EPS of $11.27. Investors were disappointed with the decline in the important metric of services signings, and IBM’s shares dropped to about $130. Market cap is about $166 billion. The stock hit a 52-week high of $134.25 on January 19.

Nonetheless, IBM is still a very strong company with a fantastic portfolio of software, hardware, and services. As far as I am concerned, a slight miss in revenue changes none of those facts.

Chart forInternational Business Machines Corp. (IBM)

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Other potential IBM acquisitions are SOASTA – a cloud computing testing specialist and Service-now, an on-demand IT service management firm. And while there are spending $15B, what about RightScale and Sonoa?

larrycincy Wednesday, July 28, 2010 at 12:07 PM PT