Industry HeadTurners #1 (Feb 3, 2005)

INDUSTRY TRENDS

Updated 2/04/05, 8:30AM MST (adds "IBM Thinks Small Is Big")

New Feature of the Comprehensive Market Service...

Computer CEO Approval Ratings

Oracle-SAP War of Words

Congress Should Lay Off IBM/Lenovo!

Fujitsu to Reduce Its Share of Hitachi Joint Venture

Capping Cap's Stock Rise

IBM to Buy Irish IT Services Firm

IBM Thinks Small Is Big in Financing

PHOENIX, Feb 3 - Every once in a while, you walk down the street and something or someone grabs your attention. "Wow," you say to yourself. "Look at that!"

Well, the same thing happens when you research industry news. And while not every interesting news item rates a comprehensive report, many tell important stories in few words... like a "picture (that) is worth a thousand words."

So with this Annex Newsflash, we are starting a new HeadTurners series. When something or someone turns our heads, we'll share it with you - for what it's worth - cryptically and succinctly. As always, we welcome your feedback.

Computer CEO Approval Ratings

Politicians are used to having various media organizations publish "approval ratings" of their on-the-job performances. Rarely is that done, however, with captains of the industry.

Well, the Forbes magazine web site has been running a survey of "computer hardware CEOs" over a year now. We have added to it the stock performance charts of five major companies during the same period to see if there is a correlations. And voila! Here are your first two HeadTurners:

It appears that there is some correlation between the Forbes' approval ratings and the stock performances of the five major computer companies. When a CEO is perceived as doing a good job, the company's stock tends to reflect that.

But some words of caution are in order. In Forbes' own words, "the CEO Approval Tracker is not a scientific poll and only reflects the opinions of those users who choose to participate." Furthermore, "technically adept users may be able to vote multiple times," Forbes admits. So the survey results have to be taken with a grain of salt. Nevertheless, one can still derive some qualitative value from the Forbes findings, such as whose image is up and whose is down.

Oracle-SAP War of Words

Since Oracle's recent takeover of PeopleSoft, the two leading enterprise application software providers have engaged in a war of words. In a presentation to investors last week, Oracle's chief, Larry Ellison, said his company "would love to get into a technology war with SAP."

It did not take long for SAP to respond to this challenge. SAP sales boss, Leo Apotheker, said in an interview with Germany's "Euro am Sonntag" (Sunday) newspaper that many PeopleSoft employees had fought tooth and nail against the takeover.

"The best of them are leaving now and taking their client contacts with them," Apotheker said, adding that PeopleSoft's human capital were "voting with their feet." "This is going to be a very expensive takeover for Oracle," he predicted.

SAP has already announced plans to hire 3,000 staff, aiming at lifting licensing revenue by 10% to 12%.

And what does the marketplace think of this war of words?

So far, it looks like Oracle has the upper hand. Its shares are up about 10% while SAP's are down by about as much. It remains to be seen if the customers agree with investors' views.

"When two fight, a third one wins," goes an old Eastern European proverb. Oracle and SAP should be mindful of that. And hope that "a third one" is the customer, not another competitor. For, their war of words may sap energies and divert attention from keeping an eye on the ball. And that's - winning the customers' hearts and minds.

Congress Should Lay Off IBM/Lenovo!

Some U.S. Congressmen are famous for meddling in corporate affairs when they can score political points, and for being AWOL when intervention is needed. The upcoming congressional review of the IBM/Lenovo PC deal is a case in point. IBM's PC business has become Congress's latest political football.

Three Republican congressmen have asked a secretive panel to review the national security implications of International Business Machines' planned sale of its PC division to Lenovo Group of China. Reps. Duncan Hunter of California, Henry J. Hyde and Donald Manzullo of Illinois asked for the review by the Committee on Foreign Investments in the United States (CFIUS), which is run by Treasury Secretary John W. Snow. The Committee members also come from the Defense, Justice, Commerce, State and Homeland Security departments.

The Committee usually clears such purchases within 30 days of a relatively simple review. That period would expire this week. But the deal will now be subject to more-thorough scrutiny for an additional 45 days, after which the Committee may recommend to President Bush whether to allow it. Alternatively, CFIUS may be able to insist on modifications.

A number of sources familiar with the investigation predicted this week that the administration will eventually clear Lenovo to buy the IBM assets, perhaps with some modest changes in the terms, according to a Washington Post Jan 29 report.

The PCs have become a low-tech commodity business, and IBM has long hinted that it would leave the field to focus on high-margin government and corporate consulting contracts. Furthermore, most of the PC parts are already manufactured offshore, most in China, and not just for IBM, but also for all other global vendors.

Meanwhile, shareholders of Lenovo, China's largest computer maker, voted overwhelmingly last week to approve the proposed $1.75 billion deal. And the Lenovo chairman, Yang Yuanqing, reiterated yesterday that the Chinese computer group's acquisition of IBM's personal computer operations involves no national security threat to the US, the Financial Times reported on its website, according to a Feb 2 report by the Chinese AFX news agency.

Yang was quoted as saying on the sidelines of a Singapore conference that other Chinese groups are seeking to make similar moves, adding that the Lenovo-IBM deal is being viewed as a test case in China.

A successful acquisition "will add a lot of benefits not only to the bilateral relationship between the two countries, but also the commercial relationship between the US and Chinese companies," he said. "I know that a lot of Chinese companies are also thinking about doing business in the US, and we hope that we can provide a good and successful example for them," he added.

Meanwhile, while harassing benign business deals, such as IBM sale of its PC business to Lenovo, Congress was AWOL when a wholesale sellout of our national interests took place some five years ago. In August 2000, the Harvard reds rolled out a red carpet for Chinese communist reds, as 25 senior Chinese military officials attended a two-week course that was supposed to teach them how to fight a war against the U.S.

Here's an excerpt from an August 2000 Truth in Media report about it, based on an original news story from the Washington Times:

Twenty-five senior Chinese military officers are attending a course at Harvard to learn details about U.S. decision-making that critics say will help China fight the United States, the Washington Times reported on Aug. 28.

The People's Liberation Army (PLA) officers arrived in Boston on Saturday (Aug. 26). They include 24 senior colonels and one navy captain who will spend two weeks at Harvard University's John F. Kennedy School of Government, according to Clinton administration officials close to the program.

The officers are there to hear lectures by current and former U.S. national security officials who have discussed how the United States would respond to a crisis over Taiwan. "Most of the officers are intelligence collectors or technology collectors," one knowledgeable official told the Times.

[...]

The Harvard program was set up in 1997 by Joseph Nye, a former Clinton administration assistant defense secretary who is dean of the Kennedy School. Mr. Nye was the official viewed as the author of the Pentagon's soft-line policy toward China. He once stated that if China is treated like an enemy, it will become an enemy.

Since the accidental bombing of the China Embassy in Belgrade, Yugoslavia, last year, China in official writings has stated that the United States is its main enemy.

George W. Bush's key campaign national security adviser, Condoleeza Rice, has said she does not regard China as a threat.

(An excerpt from TiM Bulletin, 2000/8-8, Aug 26, 2000)

So the former National Security Advisor, now the U.S. Secretary of State, doesn't think China is a threat!? Where were these three Republican congressmen when a wholesale sale of our national security was taking place at Harvard in 2000?

Fujitsu to Reduce Its Share of Hitachi Joint Venture

Fujitsu announced yesterday (Feb 2) that it will transfer to Hitachi 30.1% of the issued shares in their joint venture company, Fujitsu Hitachi Plasma Display Limited (FHP), along with related plasma display panel intellectual property rights. The companies intend to sign a formal agreement finalizing the arrangements by the end of March.

The FHP joint venture was formed in 1999 with a 50/50 Fujitsu/Hitachi ownership split. Following the transfer of Fujitsu shares in April, FHP will be an 20/80 Fujitsu/Hitachi company. The move will have a net positive effect on Fujitsu's financial results, as FHP, a money-losing venture with a negative shareholders equity of about 8.9 billion yen (about $86 million), will no longer be included in the company's consolidated financial statements.

And the company's stock could use all the help it can get after setting a new 52-week low earlier this week, following the release of its third quarter FY05 business results last Friday (Jan 28).

Capping Cap's Rise

"What goes up must come down," is an old stock market adage. Capgemini's stock rose almost six points yesterday (Feb 2) on renewed rumors in the French press about a possible takeover by "an American company."

And today, Capgemini gave up nearly half of the gain, as the company "strongly denied" any merits of such rumors. But its shareholders kept the other half, giving the stock a much-needed boost, and propelling it upward in advance of its fourth quarter business results, whose release is expected later on this month.

After bottoming out in October at 17.40 euros, Capgemini's stock has been generally on an upward march, reaching a high of 26.54 euros in today's trading, before closing at 25.59 euros.

IBM to Buy Irish IT Services Firm

It's not much, but it's a start. We have been saying for the last two years that IBM needs acquisitions to grow, particularly in the IT services field (see "Save, Split and Spend," Apr 2003, and Apr 2004).

Well, IBM has finally done it now. Big Blue announced Wednesday (Feb 2) that is had reached an agreement to buy Ireland's Equitant, which caters to companies looking to outsource their financial administration. Terms of the deal were not disclosed. But Dublin-based Equitant has a staff of 200 who manage about 44 billion euros ($57 billion) in revenues for clients.

"We consider this to be right in the fair market value of these kind of purchases," Donniel Schulman, a senior executive at IBM Business Consulting Services, told Reuters. He added the acquisition was about revenue growth rather than cost savings, and was more likely to lead to more jobs rather than cuts at Equitant.

The company plans similar buys in the future, the IBM executive added. "The outsourcing market is growing so quickly that, in order to keep up, we are always looking for new things in this area."

Halleluiah!

IBM Thinks Small Is Big in Financing

IBM is putting its money where its mouth is. Literally. Big Blue is again trying to woo small and medium size businesses (SMB), the growth engine of the U.S. economy, whose revenue contribution to Big Blue sputtered last year, according to IBM's latest financial release (see "A Crescendo Finale!", Jan 2005, "Finally Heard!", Jan 2003, and "Finally Heard, Part II", Nov 2003).

The world's biggest computer company said the new SMB financing program offers competitive market rates, a simple rate structure, and a credit approval process that promises, in most cases, contracts are delivered within one hour for deals of up to $300,000, the Reuters news service reported on Thursday (Feb 3).

The new SMB financing is available not just on IBM equipment but also on non-IBM equipment. The program, known as IBM Financing Advantage, is offered in Australia, Canada, France, Germany, Japan, Britain and the United States, IBM said.

Text Box:

IBM's new financing will also mean a shot in the arm for the company's beleaguered iSeries servers, whose sales dropped 17% last year amid a boon in other server product lines. That's because SMB customers account for a majority of the iSeries market.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out...

2005 IT: New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005);

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004); IBM Server Renaissance (Nov 2004); HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004); To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004); IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004); IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

Or just click on and use "financial engineering" or similar keywords.

Volume XXI, Annex Newsflash 2005-03
February 3, 2005

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