Annex Bulletin 2007-10                              March 6, 2007

Excerpts from CONFIDENTIAL edition (Annex clients click here for FULL version)

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IBM CORPORATE

Updated 4/21/07, 1:00PM PDT, updates Tables & Charts...

Annual Update to Annex Research's Five-year Forecast for IBM

Profit to Grow Faster Than Revenue

Acquisitions to Supplant Big Blue's Indigenous Growth

SCOTTSDALE, Mar 6 - You have to spend money to make money, goes an old saw.  The adage also applies to Big Blue.  In spades.  Even though IBM has been getting more profitable year after year (with net income in 2006 reaching $9.5 billion, up 20% over the year before), its organic growth has stalled in the low to mid single digits (only 1.3% compounded annually as reported in 2001-2006, or 4.4% per year excluding the divested PC business).

Nor is there much hope in the future for an accelerated growth from indigenous sources.  Our just completed five-year forecast for IBM has the company growing at about 5% in the next two years, and then at 4% per year in the following three.  That's a compounded annual growth of 4.6% between 2006 and 2011 (right chart).

[charts]

So in order to grow faster, IBM will need to invest in more fast-growing companies.  And IBM seems to be getting that point now.

[snip]

"Spend:" Accelerate Acquisitions

Nothing new there, of course, for our clients.  Growth by acquisitions has been our annual advice to Big Blue since four years ago (see "Save, Spend and Split," May 2003).  The "spend"-part counseled investments in smaller, fast-growth companies, especially in the software and services arena.  The only new thing this time around, IBM seems to be listening.  And acting.

The company is set to step up its acquisition spree this year, India's The Financial Express reported on Mar 5, referring to IBM 10K filing, as well as quoting an unnamed "senior investment banking" source:  

[snip]

"Save:" Accelerate Offshoring... Especially to India

Another prong of IBM's efforts to reshape itself for a "radically different future" is its offshoring plan (or "rightshoring" as other IT vendors call it).  We had already heard from the IBM CEO back in June that the company intended to spend $6 billion over the next three years in India alone, up three-fold over the past three years (see "A Tale of Two Blues," June 2006).

And where is this money going into?  

[snip]

"Save:" Reduce Stock Buybacks

Another aspect of IBM's taking our "save" recommendation seriously is a sharp reduction in stock buybacks in the second half of 2006.  Nevertheless, the heavy buying in the first half put 2006 on a par with the record amount of share repurchases that IBM carried out the year before (see the right chart).

[snip]

No Longer Much Admired

A slide in the IBM image is also evident from the just-released list of Fortune's Most Admired American Corporations.  For years, IBM seemed presubscribed to the top spot as America's most admired company.  Now it's no longer even in the Top 20 (see the Fortune table).  Only Apple, Google and Microsoft are there from among the IT vendors.

But what probably hurt the most is that IBM is no longer even in the Top 10 most admired companies for innovation, something IBM has always prided itself on, and has, in fact, made a business out of (Technology Collaboration Solutions - see "From Little Acorns Mighty Oaks Grow," Nov 2006).  

[snip]

"Split:" Slow to Break Up Sluggish Units

IBM has been the slow to implement our "split" recommendation, even though the company has taken some steps in that direction, too.  Armonk has disposed of some of its low-margin or money-losing businesses, such as the sale of its hard disk business to Hitachi (2002), of the PC unit to Lenovo (2004), and of its printer division to Ricoh (2007).  And it split up its largest unit - IBM Global Services - into two parts (2005).

[snip]

Forecast Summary 

Okay, so net it out, without significant new acquisitions, IBM revenue growth is likely to continue to stay in the 4% to 5% per year range over the next five years.  In 2011, Big Blue should be a $114 billion company, with services still accounting for about half the business.

IBM earnings, on the other hand, will grow more rapidly.  We expect them to increase by 7% compounded annually between 2007 and 2011.  

[snip]

Click here for detailed IBM forecast tables and charts (Annex clients only)

[snip]

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, who are now reading the complete Annex Bulletin, along with 9 tables and 16 charts charts that back up our forecast.  

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Happy bargain hunting!

Bob Djurdjevic

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Volume XXIII, Annex Bulletin 2007-10
March 6, 2007

Bob Djurdjevic, Editor
(c) Copyright 2007 by Annex Research, Inc. All rights reserved.
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