Some institutional investors and financial analysts are claiming that IBM CEO Sam Palmisano, after restoring the company's financial health and transforming its core strategy and operations, has not paid enough attention to significant growth opportunities. They claim that while Palmisano has made plenty of small and mid-sized acquisitions, mostly in business analytics and predictive analytics, Oracle and HP have strengthened their positions against IBM by making large-scale acquisitions.
Other analysts, however, are more bullish on IBM's growth prospects and argue that while Palmisano's numerous analytics acquisitions did not immediately boost IBM's top line significantly, those new software tools are now giving IBM the potential for significant longer-term growth as they've been woven into IBM's broader set of services and technology offerings, exemplified by its Smarter Planet initiative.
For CIOs, the answers to those questions are of profound interest for a few reasons:
1) IBM has done a terrific job of integrating and optimizing not only its hardware and software products but also its extensive and unmatched set of consulting and technology services. If IBM decides to pursue more-aggressive growth via acquisitions, will the resulting purchase and integration efforts dilute IBM's carefully crafted focus on tying together products and services with an emphasis on delivering foresight into the future via predictive analytics?
2) Strategy and technology roadmaps have begun to settle down a bit following some large and highly transformative deals in the past couple of years: HP buying EDS, Dell buying Perot, Xerox buying ACS, and Oracle buying Sun, and also Cisco jumping with both feet into servers and storage. If IBM decides to do one or two large or even mid-size deals, will primary competitors such as HP and Oracle feel compelled to respond in kind by pursuing similar deals (even though they'd never admit publicly to that rationale)?
3) CIOs have long had love/hate relationships with the "one-stop shop" ideal: they love the idea that some of their core technology partners have vast and complementary products and services, but simultaneously those CIOs hate the idea of becoming even close to overly dependent on any one tech partner. If IBM decides to buy its way into some new markets or extend its reach in some of its existing sectors, that will intensify its one-stop status. And if a domino effect sees HP or Oracle of Dell or Cisco making similar moves, CIOs could well find them selves with significantly fewer large-scale IT companies from which to choose. While not an impossible situation or without any benefits, that type of reduced-competition scenario is certainly one that CIOs would not be eager to see come about.
In such a scenario, which companies might IBM look to buy? We've got about 10 prospects listed at the bottom of this column, just before our "Recommended Reading" list.
Clanging the alarm on the need for IBM to grow was a recent article in Businessweek that leveraged the financial reporting of its new corporate parent, Bloomberg, to survey some big institutional holders of IBM stock on their view of the company's prospects. Here are some of the comments from that Businessweek piece:
**"It's time for a bold stroke, or a series of bold strokes," said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, who helps handle $12.8 billion, including 390,000 IBM shares as of Dec. 31. "It really takes a major acquisition or a series of midsize acquisitions."
**"They've maximized the model to the full extent they can," said Ben Rogoff, a manager at Polar Capital Partners in London who helps oversee $2.5 billion, including more than 127,000 IBM shares, as of Dec. 31. "It takes a fair amount of M&A to move the needle on a $100 billion revenue company."
**And this from a financial analyst who covers IBM closely: "Revenues are the elephant in the room," said Brian Marshall, an analyst at Broadpoint AmTech Inc. in San Francisco. "They [IBM] have to boost revenues materially."
On the flip side, investment site Zacks.com sees strong growth ahead for IBM, as laid out in a report under the headline, IBM Wins On New Initiative: We're Expecting Long-Term Growth:
"We believe IBM will benefit from new initiatives such as Smarter Planet, Business Analytics and Optimization and Cloud Computing, giving it a push into the next cycle of growth and productivity for its clients. These initiatives will help the company increase its customer base and deliver an improved top line in 2010.
"We do believe that IBM is fundamentally a sound company and has a strong market position but our caution is related to our expectations of near-term bumps due to increasing competition in cloud computing, virtualization and enterprise analytics from EMC Corp., VMware Inc., Hewlett-Packard Company and Teradata Corp.
"However, we remain optimistic on the company's long-term growth and expect it to post stronger results in 2010."
And the investment site AlphaEarnings.com has also expressed bullishness over IBM's growth prospects:
"Disappointing software growth and conservative guidance raise have jeopardized chances of a better Q1 2010, but several upcoming catalysts including a new server launch this quarter and improved software close rates are expected to improve both earnings and fundamentals further in 1H10. . . .
"IBM finished the year with a strong performance and managed to deliver growth in margins, profits and earnings. It also continued to benefit from their strategic transformation and their commitment to developing countries around the world. 2009 saw IBM investing in Smarter Planet Solutions, cloud computing and advanced analytics, which has put the company in a position to grow as the economy revives.
". . . . several large software deals which were pushed into Q1 2010 combined with an easy compare should be able to drive software revenue growth this quarter. Also, high-end server sales should improve with the launch of new Power-based server products in Q1. . . . Going forward IBM is well positioned to capitalize on several growth areas and opportunities improve operating margins."
And if Palmisano & Co. decide to go the acquisition route, the Businessweek article says that some investment bankers suggested the following companies as possible takeover targets: EMC, NetApp, Juniper Networks, RIM, BMC, and Brocade.
Interesting guesses, to be sure, but I wonder if they're looking in the wrong directions: toward more products, particularly pushing into the networking space or more deeply into storage. Is that really an indicator of where IBM seems to be headed, particularly since the investors' gripe was about growth and not a dearth of technology?
Instead, perhaps IBM would look to fortify its presence in software—if that's the case, then the possibilities could include big and well-run companies ranging from CA to Informatica to SAP, each of which could significantly enhance IBM's current positions while also giving it a nice revenue bump as well. Each of those companies, and particularly SAP, has significant numbers of world-class customers whose collective experiences could blend right into IBM's Smarter Solutions strategy.
IBM is scheduled to announce first-quarter earnings a week from today on April 19, and it'll be interesting to see if the company's been able to return to broad-based growth and what it's future outlook looks like as well.
Bob Evans is senior VP and director of
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