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IBM’s Next Steps In Acquisitions

Posted on Thursday, Oct 21st 2010

IBM (NYSE:IBM) this week reported strong results that beat estimates, and it raised its full-year outlook. IBM continued its acquisition spree and in the recent quarter closed 11 acquisitions for a total of about $3 billion. IBM has said it will spend $20 billion on acquisitions through 2015. What should it acquire next? Let’s take a closer look.

IBM’s Financials
IBM reported third quarter revenue of $24.3 billion, up 3%. Net income increased 12% to $3.6 billion or $2.82 per share from $3.2 billion or $2.40 per share in the third quarter of 2009. Gross profit margin was 45.3% versus 45.6% last quarter and 45.1% last year. IBM ended the quarter with $11.1 billion of cash on hand and debt of $27.5 billion. The company returned $4.5 billion to shareholders through $0.8 billion in dividends and $3.7 billion of share repurchases.

IBM said revenue from its growth markets increased 16% and accounted for 21% of total revenue. Revenues in the BRIC countries – Brazil, Russia, India and China – increased 29%, and 28 other growth market countries also had double-digit revenue growth. IBM now has 103 sales offices in the growth market countries after opening 40 offices in 2010. Asia-Pacific revenues increased 14% to $5.9 billion, while revenue in the Americas increased 3% to $10.2 billion.

Total Global Services revenues increased 2% with Global Technology Services revenue up 1% to $9.5 billion and Global Business Services revenue up 5% to $4.6 billion. Systems and Technology revenue was up 10% to $4.3 billion. Software revenue was up 1% to $5.2 billion with the company’s key middleware products, which include WebSphere, Information Management, Tivoli, and Lotus increasing 7% to $3.1 billion.

During the quarter, IBM signed services contracts totaling $11 billion, down 7% over the year and including ten services contracts greater than $100 million. Based on its performance, IBM has raised its 2010 per-share profit target to at least $11.40 from the previous outlook of at least $11.25. Analysts expect full-year EPS of $11.27. IBM’s shares are trading around $138 with market cap of about $174 billion. The stock hit a 52-week high of $142.101 on October 15.

Chart forInternational Business Machines Corp. (IBM)

IBM Should Target Security through Acquisitions
In August, IBM announced its plans to buy marketing automation software maker, Unica for $480 million and data capture software maker DataCap for an undisclosed sum. In September, it announced its plans to buy OpenPages, which helps companies identify and manage risk and compliance activities across the enterprise through a single management system.  Next, it announced plans to buy data analytics company Netezza for $1.7 billion and data center switching company BLADE Network technologies for about $400 million.

This month, IBM announced plans to buy data analysis and cost assessment firm PSS for an undisclosed sum. PSS software is primarily targeted at chief legal officers as well as IT executives, and its client list includes GE, ConocoPhillips, and Pfizer. The PSS portfolio will be added to IBM’s Information Lifecycle Management product line.

I recently interviewed the CIO of IBM, Pat Toole as part of the Thought Leaders in Cloud Computing Series. Toole pointed out that security and cybersecurity in the cloud is an opportunity that entrepreneurs can zero in on. And it is an opportunity that even IBM should seize by acquiring Qualys, the Salesforce.com 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 that I have been saying IBM could acquire is e-mail security provider Proofpoint, which itself has rolled up two startups. I recently interviewed its CEO, Gary Steele. And a third target could be Palo Alto Software, a rapidly growing $100 million a year next generation firewall provider. You can read my interview with founder Nir Zuk for further details.

IBM’s strategy has been to acquire companies in the infrastructure software space, and these three security companies are each excellent prospects that will each turn into billion-dollar businesses for the company.

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