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IBM on an Acquisition Spree

Posted on Friday, Dec 11th 2015

IBM’s (NYSE: IBM) revenues have been on a decline for 14 consecutive quarters now and it has been trying hard to drive its focus toward the cloud, Internet of Things, artificial intelligence, and analytics. IBM has made 12 acquisitions this year, with the cloud and its cognitive system Watson driving them.

IBM’s Financials

IBM’s third quarter revenue declined 13.9% over the year to $19.3 billion, falling short of the market’s expectations of $19.6 billion. EPS of $3.34 was, however, ahead of the Street’s projections of $3.30.

By segment, revenues from global technology services declined 10.2% over the year to $7.9 billion. Global Business services continued to report a decline and revenues fell 13.1% to $4.2 billion. Software revenues declined 10% to $5.1 billion and systems hardware revenues were down 38.7% to $2.06 billion. Global Financing revenues reduced 8.1% to $447 million.

During the third quarter, revenues from its strategic imperatives of the cloud, analytics, social, mobile and security grew 27% and 30% year-to-date. Cloud revenue grew 65% year-to-date and analytics grew 20% year-to-date. Security business was up 12%, social up about 40%, and mobile business quadrupled. It expects them to represent more than 40% of the company’s business by 2018, or revenue of about $40 billion, compared to $25 billion for 2014. These business units have also helped IBM improve gross margins, from 40% a decade ago to 50% in the most recent quarter.

IBM lowered its full year 2015 guidance for non GAAP EPS to a range of $14.75-$15.75 from $15.75-$16.50.

IBM Bets Big on Watson

Watson follows the human thinking process of observing, interpreting, evaluating, and decision making to help automate processes across multiple industries. In January 2014, IBM invested $1 billion to set up the Watson Business Group to recast the natural language learning system as the force behind cloud analytics services for the pharmaceutical, retail, banking, media, and education industries. IBM says healthcare will be one of its biggest growth areas over the next 10 years. So in April this year, IBM turned up the heat on Watson with the launch of Watson Health, its first vertical offering involving the technology.

Since then, it has struck a number of partnerships within the healthcare field, from medical device manufacturer Medtronic, to Johnson & Johnson and Apple. Last year, IBM had collaborated with Apple to develop 100 enterprise apps, but this new deal will help it tackle the silo problem—how to interface with health data sets, bring them into Watson Health Cloud, and provide health services.

It has also acquired several companies, including medical imaging company Merge for $1billion in August, which will allow its analytics systems to provide insights to doctors about X-rays, medical images, and written material shared through Merge. Earlier in the year, it had acquired data company Explorys and health management software firm Phytel. Explorys connects to healthcare providers’ systems to bring their data into the cloud and run analytics on it while Phytel’s software enables clinicians to manage individuals’ care.

Its latest acquisition to boost Watson is that of The Weather Company in late October in a deal estimated at over $2 billion. IBM plans to use data from over 40 million mobile phones and 147,000 sensors in weather observing stations to create a new generation of predictive applications.

IBM recently made available proprietary machine-learning technology under an open-source license called SystemML, which could help developers create customized machine-learning software.

IBM’s Acquisition Spree

Another big focus area of IBM’s recent acquisitions is the cloud. Earlier in the year, it picked up Blue Box to accelerate open hybrid cloud and Compose to expand cloud data services. In October, IBM announced its plans to acquire hybrid storage specialist Cleversafe for an undisclosed sum. IDC estimates that 80% of new cloud applications will be “big data intensive,” and that the object storage market will reach $28 billion by 2018.

In November, IBM picked up cloud brokerage firm Gravitant for an undisclosed sum. Gravitant helps manage cloud purchases across multiple vendors. It will be integrated into IBM’s Global Technology Services unit and will also be used by IBM Cloud in its SaaS offerings.

This week, IBM announced its plans to acquire cloud video firm Clearleap for an undisclosed sum. Clearleap’s  customers include HBO, The History Channel, Time Warner Cable, and Verizon. Clearleap is expected to give IBM the opportunity to sell video services directly or provide tools for building video-centric applications.

Despite these very interesting moves, IBM’s stock is trading at $136.78 as the market is still awaiting positive results. Its market capitalization is around $132 billion. It touched a 52-week high of $176.30 in May and a 52-week low of $131.65 last month.

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