IBM AnalysisIBM Analysis

POLITECNICO DI MILANO

Master of Science inManagement, Economics and Industrial Engineering

Management Control Systems

Prof. Paolo Maccarrone

First Assignment: IBM Analysis

GroupFerrario Andrea

Rognoni SusannaTaiana Marco

Trifonov Angel

IBM AnalysisIBM Analysis

A.Y. 2007/2008

IBM AnalysisIBM Analysis

IndexIndexCompany profile...........................................................................................................- 3 -

Logos....................................................................................................................................- 4 -

Subsidiaries................................................................................................................. - 5 -

Market and Industry.....................................................................................................- 7 -

Accounting principles...................................................................................................- 9 -

Profitability analysis: first level...................................................................................- 10 -

ROE....................................................................................................................................- 10 -

Profitability analysis: second level............................................................................. - 11 -

ROA....................................................................................................................................- 11 -

TL/E....................................................................................................................................- 11 -

Average Net Cost of financing activities (f)........................................................................- 11 -

Return of fiscal and discontinued operations (s)................................................................- 11 -

Profitability analysis: third level..................................................................................- 12 -

ROS (Return on sales).......................................................................................................- 12 -

Assets Turnover.................................................................................................................- 12 -

Average cost of third party capital (r)..................................................................................- 12 -

Return on financial assets (p).............................................................................................- 12 -

FA/TL..................................................................................................................................- 12 -

Tax incidence (t).................................................................................................................- 12 -

Incidence of discontinued operations (d)............................................................................- 12 -

Profitability analysis: fourth level................................................................................- 13 -

Inventories Turnover...........................................................................................................- 13 -

Average collection period for receivables...........................................................................- 13 -

Operative fixed asset turnover............................................................................................- 13 -

Liquidity Analysis....................................................................................................... - 14 -

Short term...........................................................................................................................- 14 -

Long term...........................................................................................................................- 14 -

Financial Structure Analysis...................................................................................... - 15 -

Benchmarking............................................................................................................- 16 -

ROE....................................................................................................................................- 16 -

ROA....................................................................................................................................- 16 -

Average Net Cost of financing activities (f)........................................................................- 16 -

Financial Leverage.............................................................................................................- 17 -

Return of fiscal and discontinued operations (s)................................................................- 17 -

IBM AnalysisIBM Analysis

IBM AnalysisIBM Analysis

Company profileCompany profile

International Business Machines Corporation, abbreviated IBM is a multinational computer technology and consulting corporation headquartered in Armonk, New York, USA. The company is one of the few information technology companies with a continuous history dating back to the 19th century. IBM manufactures and sells computer hardware and software, and offers infrastructure services, hosting services, and consulting services in areas ranging from mainframe computers to nanotechnology.

History of IBM

The company which became IBM was founded in 1888 as the Tabulating Machine Company by Herman Hollerith, in Broome County, New York. It was incorporated as Computing Tabulating Recording Corporation (CTR) on June 16, 1911, and was listed on the New York Stock Exchange in 1916. IBM adopted its current name in 1924, when it became a Fortune 500 company.In the 1950s, IBM became the dominant vendor in the emerging computer industry with the release of the IBM 701 and other models in the IBM 700/7000 series of mainframes. The company's dominance became even more pronounced in the 1960s and 1970s with the IBM System/360 and IBM System/370 mainframes, however antitrust actions by the United States Department of Justice, the rise of minicomputer companies like Digital Equipment Corporation and Data General, and the introduction of the microprocessor all contributed to dilution of IBM's position in the industry, eventually leading the company to diversify into other areas including personal computers, software, and services.In 1981 IBM introduced the IBM Personal Computer which is the original version and progenitor of the IBM PC compatible hardware platform. Descendants of the IBM PC compatibles make up the majority of microcomputers on the market today, though IBM sold its PC division to the Chinese company Lenovo on May 1, 2005 for $655 million in cash and $600 million in Lenovo stock.Nowadays IBM is very active in different sectors: from servers provided with different operating systems (AIX, Linux, Windows), to software, to information technology services, to microprocessors (for example the PowerPC used into Xbox360 or Nintendo Wii and Multimedia Cell processor developed together with Sony and Toshiba used into PlayStation 3), to printers and so on.On January 25, 2007, Ricoh announced purchase of IBM Printing Systems Division for $725 million and investment in 3-year joint venture to form a new Ricoh subsidiary, InfoPrint Solutions Company; Ricoh will own a 51% share, and IBM will own a 49% share in InfoPrint.

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IBM AnalysisIBM Analysis

LogosLogos

The logo that was used from 1924 to 1946.The

logo is in a form intended to suggest a globe, girdled by the word "International".

The logo that was used from 1947 to 1956. The

familiar "globe" was replaced with the simple

letters "IBM" in a typeface called "Beton

Bold."

The logo that was used from 1956 to 1972. The letters

"IBM" took on a more solid, grounded and balanced

appearance.

In 1972, the horizontal stripes now replaced

the solid letters to suggest "speed and

dynamism."

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IBM AnalysisIBM Analysis

SubsidiariesSubsidiaries

Analyzing the IBM Group merge that some of its geographical divisions are subsidiaries of the company:

IBM China/Hong Kong that provides IBM products and services to customers in Hong Kong and China; it is also a leading provider of enterprise computing and data storage systems. IBM established its presence in Hong Kong in 1957

IBM Australia incorporated in 1932 IBM Canada encompasses research and development, manufacturing, sales, marketing,

and service operations. Major divisions include a software research and development lab in Ontario that is one of the largest IBM R&D centre in the world. Its semiconductor packaging plant in Quebec provides test and assembly services to its parent company as well as other manufacturers. Additionally, IBM Canada provides IT consulting through subsidiary LGS Group which also operates in Europe. IBM established operations in Canada in 1917.

IBM India is the Indian subsidiary of IBM. It has facilities in Bangalore, Delhi, Kolkata, Chennai, Pune, Gurgaon, Noida and Hyderabad. Since 2006, IBM has been the multinational with the largest number of employees in India.

IBM count a large number of subsidiaries spread all over the world, here are listed some of those companies:

ADSTAR was a hardware storage division of IBM. ADSTAR was sold to Tivoli Systems, Inc., but later Tivoli was purchased by IBM. ADSTAR is primarily known for a backup and recovery product named ADSTAR Distributed Storage Manager.

Cognos (formerly Cognos Incorporated) is an Ottawa, Ontario based company which makes business intelligence (BI) and performance management software. Founded in 1969, Cognos employed almost 3,500 people and served more than 23,000 customers in over 135 countries. Cognos was originally known as Quasar and adopted its current name in 1982. On January 31, 2008, Cognos was officially acquired by IBM. Cognos 8 BI, which was launched in September 2005, combines the features of several previous products: ReportNet, PowerPlay, Metrics Manager, Noticecast, and Decision Stream.

DataPower was recognized early as an innovator in XML processing. XML messaging is now considered a critical element to service-oriented architecture (SOA). DataPower was a Cambridge, Massachusetts-based manufacturer of network devices acquired by IBM in 2005.

Dehomag was a German business, effectively a franchisee and subcompany of IBM.

FileNet, a company now owned and assimilated by IBM, developed software to help enterprises manage their content and business processes. The FileNet P8 platform, their flagship system, is a framework for developing custom enterprise systems, offering much functionality out of the box and capable of being customized to manage a specific business process.

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IBM AnalysisIBM Analysis

Holosofx was a privately held company based in El-Segundo, CA that worked in the field of Business Process Management (BPM). IBM acquired Holosofx in 2002. The software department of Holosofx was based in Cairo, Egypt.

IBM Internet Security Systems is a security software provider which was founded in 1994 as Internet Security Systems, and is often known simply as ISS or ISSX (after its former NASDAQ ticker symbol). The company was acquired by IBM in 2006.

Lotus Software (called Lotus Development Corporation before its acquisition by IBM) is a software company with headquarters in Westford, Massachusetts. Lotus also released a groupware and email system, Lotus Notes. IBM purchased the company in 1995 for $3.5 billion, primarily to acquire Lotus Notes and to eMRO Software, Inc. - formerly known as PSDI, was a software firm based in Bedford, Massachusetts, which published Maximo, the top-selling Enterprise Asset Management system in the market. On August 3, 2006 the company was acquired by IBM for cash consideration of $739 million. On April 1st 2007, MRO Software ceased to exist as the Transfer of Trade to IBM took place.

Rational Machines was founded by Paul Levy and Mike Devlin in 1981 to provide tools to expand the use of modern software engineering practices, particularly explicit modular architecture and iterative development. Rational was sold for US$2.1 billion to IBM on February 20, 2003.

Tivoli Software is the systems management brand of the IBM Software Group. IBM purchased Austin-based Tivoli Systems, Inc. in 1996[1] and allowed it to operate as a wholly owned subsidiary for a few years before forming the Software Group. In addition to Tivoli this IBM division includes WebSphere, Information Management, Lotus Software and Rational Software. In August 2006, IBM acquired MRO Software, intending to add them to the Tivoli division. In March 2008 IBM added Ecentuate to Tivoli. The Storage portfolio contains Tivoli Storage Manager, which is one of the most widely used applications for backup, disaster recovery and information lifecycle management. It is notable for its use of a relational database that allows for progressive back up forever, reclamation and collocation functionalities. Tivoli products are handled by IBM offices around the world. Major offices for Tivoli sales, development and support are located in Austin, TX; Raleigh, North Carolina; San Jose, CA; Tucson, AZ; Atlanta, GA; Markham, ON; Greenville, SC; Staines, Great Britain; Kraków, Poland; Rome, Italy; and Pune, India.

IIG, IBM International Group

In Italy IBM count other subsidiaries as Global Value-Intesa, Proxima S.p.a which became the Business Unit Oracle Apllication of IBM and IBM Sap Services.

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IBM AnalysisIBM Analysis

Market and IndustryMarket and IndustryBeing IBM a so large and diversified company, it is very difficult to define its competitors in a complete and exhaustive way; moreover, the different competitors can be considered direct ones only in some businesses. So we decided to consider two different taxonomies, both obtained by authoritative sources.Hoovers, in fact, one of the leaders in financial and business information providing, sustains that IBM competitors are primarily in the Information Technology Services industry. According to the same source, IBM also mainly competes in the Computer Networking Equipment, Computer Peripherals, and Mass Storage Systems sectors. There are a number of smaller sectors but the classification made in this way finds in EDS (Electronic Data Systems Corporation), Hewlett-Packard Company, and Microsoft Corporation the main companies competing with IBM.On the other side Yahoo Finance puts IBM in the macro-sector called “Technology”, in the industry called “Diversified Computer Systems”; this second way of considering IBM competitors is very different from the one briefly described before, essentially because in this case the biggest contenders are essentially identified, beyond the already considered Hewlett-Packard Company, in Sun Microsystems Inc. and Scientific Games Corporation. Giants such as Microsoft Corporation and EDS (even if present on this market) wouldn’t be considered anymore between the direct competitors, because this wide industry is still too reductive for these companies. However, since the number of businesses in which IBM and Microsoft compete worldwide is really relevant, the degree of interdependency in the strategies of the two corporations is very high.In addition, we have to consider that the main trend of the past years in informatics field was to pass from hardware production to a complete offering of solutions. That was because hardware can be considered a commodity, while services and packages of products and services can be more differentiable and so far more profitable. From these considerations, it seems reasonable to take in consideration, also when we will briefly benchmark IBM performances with those of its competitors, the main names that emerge from both the classifications. However among the “diversified computer systems” industry, IBM is the leader in market capitalization with 170,39 $billions against the 49,13 $billions and the 13,04 $billions of HP and Sun Microsytems. Considering also Microsoft and EDS and a larger view on “Information technology services” industry, the leader in capitalization is Microsoft with 273,72 $billions and EDS is the third actor with 9,48 $billions. We perfectly know that market capitalization is only one of a number of indicators to describe the dimensions and the characteristics of a market but a deeper analysis will be conducted at the end of this report.It is of these days the news about the takeover of EDS by HP, that shows how the market of IT services is the real key to read the situation and the competition between the giants before named, thanks to the high profitability and the future scenarios of strong further developing. The total sector amounted in 2007 for 748 $billion, an amount that is doomed to grow at a 6-8% a year till 2011.

Company 2007 Revenue

2007 Market Share (%)

2006 Revenue

2006 Market Share (%)

Growth (%)

IBM 54,148 7.2 48,247 7.1 12.2EDS 22,130 3.0 21,396 3.2 3.4Accenture 20,616 2.8 17,228 2.5 19.7Fujitsu 18,620 2.5 17,918 2.6 3.9HP 17,252 2.3 15,963 2.4 8.1

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IBM AnalysisIBM Analysis

CSC 16,306 2.2 15,136 2.2 7.7

The acquisition of EDS by HP builds the second player of this flourish market and the situation of market share will see some modifications even if IBM leadership seems not to be in discussion in the short-medium period. The main difference is that IBM essentially targets the business market while the giant HP-EDS is really diversified and in the consumer market has a cash-cow in the printing consumables that accounts for huge cash amounts that are reinvested in other businesses. On the hardware front, while IBM passed to Lenovo its hardware production, except for servers, HP is the largest world manufacturer, since the turbulent acquisition of Compaq. We will see in the following paragraphs how IBM prepared itself for the tough competition of next years.

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IBM AnalysisIBM Analysis

Accounting principlesAccounting principlesTraditionally for an US company IBM has also accepted the “Generally Accepted Accounting Principles” (GAAP) framework. A particular thing in the GAAP is the freedom it provides to the company to be described from a preferred point of view. In the case of IBM it can be observed in the managerial decision in 2007 to change the presentation of revenue and cost in the Consolidated Statement of Earnings to reflect the categories of Services, Sales and Financing. Previously, the presentation included Global Services, Hardware, Software, Global Financing and an Other category. In the past, these categories were aligned with the company’s reportable segment presentation of external revenue and cost. However, as the company moves toward delivering solutions which bring integrated software and services capabilities to its clients, the alignment between segments and categories will diverge. Therefore, there are situations where the Global Services segments could include software revenue, and conversely, the Software segment may have services revenue.

GAAP is really based on the simplest principles of accounting and on these it mostly aligns with the framework proposed by IFRS. The same can be said about the principles of consolidation which are totally referent except for some aspects of the accounts of variable interest entities.

GAAP and IFRS basically differ in some major points. Generally speaking the first one is more “rule-specific” with more specific application guidance. The second ones are more “principles based” and with limited application guidance. If we look at the differences point by point and refer it to the regarded case the most significant differences are:

GAAP does not require and yearly financial report. Obviously because of the necessities of the stock market IBM prefer to do one as stated by the ISFR

GAAP does not require statement of changes in equity and this is replaced by a grand total of “Comprehensive income”. In the case of IBM a stamen of changes in equity could have been very useful regarding the structural changes and the M&A it underwent the past few years.

GAAP requires that the interests received and paid must be classified as an operating activity. In the case of IBM this is interesting regarding the adoption of services and finance as core businesses.

Classification of deferred tax is split to current and non-current. GAAP provides as basis for evaluation of property, plant, equipment – the historical cost with

depreciation and impairment losses. Revaluated amount is not recommended. In GAAP the revenue recognition is according to a mores industry specific recognition guidance.

Still IFRS is consistent with it. In GAAP it is the management of the company that is expected to make financial estimates

and assumptions that affect the amount of assets, liabilities, etc.

As most of the companies prefer to deliver their accounting policies in IFRS, GAAP and IFRS has come up with an memorandum of alignments which is supposedly going to be completed in 2008 in order to align the USA preferred GAAP to the ISFR. The changes mentioned in the memorandum do not affect deeply any of the reporting principles that are applied by IBM or its subsidiaries.

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IBM AnalysisIBM Analysis

Profitability analysis: first levelProfitability analysis: first level

ROEROE

The IBM’s ROE increased from 2006 (33,298%) to 2007 (36,593%) thanks mainly to an increase in profits.The increase in profit before income taxes was primarily due to:

Revenue growth thanks to :o the strong performance from Global Technology Services and Global Business Services with

growth in all business lines;o the continued strong demand in the Software business, driven by Key Branded

Middleware1 products, with positive contributions from strategic acquisitions;o the continued growth in emerging countries (Brazil2, Russia, India and China: up 26 percent)

and solid performance in all geographies, led by Asia Pacific.

Gross profit margin improvements in the Global services and Systems and Technology segments: o the consolidated gross profit margin increase 0,4 points from 2006 due to an improvement

in the Systems and Technology margin (2,0 points) contributed 0,5 points to the overall margin improvement

o the software margin that was flat at 85,2 percent, but contributed 0,2 points to the overall margin improvement due to the mix of revenue by segment

o The Global Technology Services and Global Business Services margins increased 0,1 points and 0,4 points respectively. Although gross profit margins improved for Global Services, the increased Global Services revenue content contributed to a 0,2 point decline in the consolidated gross margin due to the mix impact. The Global Financing margin declined 3,5 points versus 2006 to 46,7 percent, causing a 0,1 point decline in the overall company margin.

Stockholders’ equity 3of $28.470 million was essentially flat versus 2006. Increased Treasury stock ($17,649 million) from share repurchases, which included the ASR4, was largely offset by increased Retained earnings ($8.208 million) driven by Net income, increased Common stock ($3.917 million) related to stock options

1 Software Acquisitions – Fortifying IBM’s Middleware Platform - Since 2001, IBM has consistently pursued a strategy to grow and diversify its software portfolio organizally, through innovation, and with targeted acquisitionsIn 2006, IBM invested almost $5 billion on 13 acquisitions, including the following larger acquisitions:FileNet ($1.6 billion)Internet Security Systems ($1.4 billion)Micromuse ($0.9 billion)MRO Software ($0.7 billion) In the fourth quarter of 2006, revenue growth from 2006 acquisitions in total was up about 50% year-over-year, with the majority of acquisitions exceeding their business cases.

2 In October of 2003, a report from a prominent investment banking firm linked four developing powerhouse economies together with a fateful acronym — BRIC, for Brazil, Russia, India and China. The quartet of nations has huge economic potential in common, but one of them has garnered considerably less attention than the others: Brazil. Information technology spending in Brazil is growing at 10 % annually, and exports of hi-tech goods were expected(2004) to total 2 billion of dollars in 2007.

3 The authorized capital stock of IBM consists of 4,687,500,000 shares of common stock, $.20 par value, of which 1,385,234,138 shares were outstanding at December 31, 2007 and 150,000,000 shares of preferred stock, $.01 par value, none of which were outstanding at December 31, 2007.

4 May 29, 2007

IBM announced today that it has repurchased $12.5 billion of its outstanding common stock through accelerated share repurchase agreements (ASR). Under the agreements, the company repurchased 118.8 million shares, or 8 percent of the outstanding shares of common stock as of May 29, from three banks for an initial price of $105.18 per share.  These repurchased shares will be classified as treasury shares. The banks are expected to purchase an equivalent number of shares in the open market during the next nine months.  The initial price of the ASR is subject to an adjustment based on the volume weighted average price of the shares during this period.  IBM does not plan to make any additional stock repurchases during this period.

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IBM AnalysisIBM Analysis

and a decline in Accumulated gains and (losses) not affecting retained earnings ($5.487 million) primarily due to the effects of pension re-measurements.

Profitability analysis: second levelProfitability analysis: second level

ROAROA

The IBM’s ROA decreases from 2006 (12,427%) to 2007 (12,016%). During the 2007 both the Net Operating Income and the Assets increased. Total assets increased $17,197 million ($12,957 million adjusted for currency) primarily due to increases in Cash and cash equivalents ($6,969 million), Prepaid pension assets ($6,788 million), total financing receivables ($2,729 million) and Goodwill ($1,431 million). These increases were partially offset by decreases in long-term deferred tax assets ($2,367 million) and short-term marketable securities ($1,479 million).

Financial Leverage (TL/EFinancial Leverage (TL/E) )

It is the Financial Leverage; it increases from 2006 (2,6215) to 2007 (3,2301). The reason is an increase in the Total Liability while the stockholder’s equity remains substantially flat from 2006 to 2007. Total Liabilities increased $17,234 million ($13,642 million adjusted for currency) driven primarily by increases in total debt ($12,592 million), tax liabilities ($1,492 million) and total deferred income ($1,773 million).

Average Net Cost of financing activities (f)Average Net Cost of financing activities (f)The financial activities increase from 2006 (-0,653%) to 2007 (-0,016%). The Total Liabilities increased due to the Total Assets increase. At the numerator there is an increase in the Interest Expenses. The Interest Expenses increased $333 million primarily due to higher debt associated with the financing of the ASR.

Return of fiscal and discontinued operations (s)Return of fiscal and discontinued operations (s)The return of fiscal and discontinued operations was essentially flat from 2006 (0,7128 ) and 2007 (0,7190 ) having a 0,626 gap; this is due to extraordinary operations that have no relevance during this year.Calculating this index there are no minority interests, that’s common for the listed companies, because there are lots of small stockholders and it is not possible to keep track of the movements of their stock.

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IBM AnalysisIBM Analysis

Profitability analysis: third levelProfitability analysis: third levelIn this part we will analyze the determinants of ROA (ROA = ROS x Assets Turnover), Average Net Cost of financing activities (f = r – (p x FA/TL)), and of Return of fiscal and discontinued operations (s = t x d).

ROS (Return on sales)ROS (Return on sales)IBM’s ROS increased of 0,616 % from 2006 (14,032%) to 2007 (14,649%). During the 2007 both the Net Operating Income and the Sales increased. The increase of ROS is due to the different rate of increase of the Net Operating Income and the Sales; the Net Operating Income increased of 12,799% while the Sales increased of 8,053%. This result means that there is a higher Income with sales being equal and this is better understandable analyzing the fourth level indicator (added value/sales) which indicates that there's an increase in the added value of the products. Considering that a larger part of the revenues come in 2007 from services, it is clear that this business is more profitable and allows for higher margins.

Assets TurnoverAssets TurnoverThe Assets Turnover decreased of 6,533% from 2006 (0,8856) to 2007 (0,8203). The reason is a big increase in the Assets (16,658%) with a lower increase in the Sales (8,053%). The large number of acquisitions made in the two years increased significantly the assets value, while probably the income has not yet increased as expected because it needs some time to completely integrate the new businesses and to fully join the synergies between IBM and the acquired companies.

Average cost of third party capital (r)Average cost of third party capital (r) The average cost of third party capital increased of 0,292% from 2006 (0,372%) to 2007 (0,664%). The reason of this growth is a substantial increase of the financial interests: 119,8% from 2006 (278 M$) to 2007 (611 M$). This is the main negative consequence of the high value of liabilities and thus of financial leverage, that is passed from 2,6 to 3,2. In fact, the cost of money increases with the growth of the debts, because the loaners ask for higher interest rates to cover the higher risks.

Return on financial assets (Return on financial assets (p)p)The Return on financial assets decreased of -1,88% from 2006 (4,234%) to 2007 (2,354%). The reason of this result is due to a big increase of the financial assets (+47,01%) from 2006 (18090 M$) to 2007 (26594 M$) with a decrease of the financial incomes (-18,28%) from 2006 (766 M$) to 2007 (626 M$). In the 2005-2006 period financial incomes had a severe decline: from 2006 to 2007 this process continued due to losses on derivatives instruments, only partially mitigated by the gains from printing business divestitures.

FA/TLFA/TLThe financial assets and liabilities ratio increased of 4,711% from 2006 (24,208%) to 2007 (28,919%). This increase is due to a big increase in the financial assets (+47,01%) from 2006 (18090 M$) to 2007 (26594 M$) with a lower increase in the total assets (+16,66%) from 2006 (103234 M$) to 2007 ( 120431 M$). In particular the increasing of long-term debt had a big weight on the value of financial assets in the framework provided by the ASR agreements: they were stipulated between IBM and some banks and forces IBM to buy part of its own stock for a period. IBM in this way hoped to realize an income by the selling of the same shares at a higher price to the same banks 9 months after and by the increase of dividends related to the same shares.

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IBM AnalysisIBM Analysis

Tax incidence (Tax incidence (t)t)The Tax incidence increased of 3,54% from 2006 (0,9634) to 2007 (0,9988). The reason of this very small increase is due to a bit higher increase of the net operating income (+12,8%) from 2006 (12829 M$) to 2007 (14471 M$) compared to the increase of the profit before tax (+8,801%) from 2006 (13317 M$) to 2007 (14489 M$).

Incidence of discontinued operations (Incidence of discontinued operations (d)d)The incidence of discontinued operations decreased of -1,996% from 2006 (0,7399) to 2007 (0,7199). The cause of this result is the higher increase of the net operating income (+12,8%) from 2006 (12829 M$) to 2007 (14471 M$) compared to the growth of the profit (+9,756%) from 2006 (9492 M$) to 2007 (10418 M$).

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IBM AnalysisIBM Analysis

Profitability analysis: fourth levelProfitability analysis: fourth levelInventories turnover, average collection period for receivable and operative fixed asset turnover are all determinants of the assets turnover

Inventories TurnoverInventories TurnoverThis indicator increases from 2006 (32,535) to 2007 (37,082) but this result is not very significant because it considers the amount of the total sales. To obtain a significant value of this indicator we have to consider only the amount of sales coming from the hardware/software units of the company without considering the sales coming from the financing and services units. With this method, we can see an increase of the Inventories turnover from 2006 (14,49) to 2007 (15,84) and this result is much more realistic than the other one.

Average collection period for receivablesAverage collection period for receivablesThis index decreased from 2006 (107,19) to 2007 (106,37). This result doesn't highlight a big difference between 2006 and 2007 and the ability of the company in collecting cash didn’t change: probably the average period of payment for hardware customers is shorter but the large amount of financial receivables determined by financing and services increased this indicator.

Operative fixed asset turnoverOperative fixed asset turnoverThe operative fixed asset turnover increased from 2006 (6,33) to 2007 (6,55) due to an higher increase of the sales (+8,053%) from 2006 (91424 M$) to 2007 (98786 M$) compared to the increase of the net value fixed assets (+4,439%) from 2006 (14440 M$) to 2007 (15081 M$). Probably the value of fixed assets was lowered by the divestitures in the hardware and printing equipment business.

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IBM AnalysisIBM Analysis

Liquidity AnalysisLiquidity Analysis

Short termShort termThe short term liquidity analysis represents the ability of the company to meet its current debt obligations with short-term available liquidity.Indicators:

Current ratio: The current ratio of 1.2 against 1.114 (an increase of 0.086) indicates a relative increased short-term financial health of the organization. Having in mind that the recommended reasonable range for the ratio is 1.1 - 2:11.5 (can vary depending on the industry), we can say that in terms of short term liquidity the position of IBM is a just a bit short. This however can be explained by the overall concept of the company focused on expansion by acquisitions. This ratio can also be indicating that the company is utilizing the current assets very well . Iespecially f we consider the strong cash flow balance being supported by a long term-debt, almost half of which is with maturity after 2012 we can conclude that the position indicated by the index is reasonable.

Working capital: For the period of one year IBM almost doubles the working capital from 4.569,00 $ to 8.867,00 $ (in millions). This is a strong reflection of the change in IBM’s business mode l. l. Letting go on the businesses that are related to manufacturing and moving towards the various services areas result in no cash being held in inventories and a strong collectivity of receivables.?The restructuring of the business model, moving to new business areas and numerous acquisitions result in lower collectivity and increase in accounts receivable-trade and short-term financing receivables with at about 2 billion. This can be viewed more as a result of the greater scale of operations and IBM’s B2C policies. Probably as to manage this deficiency and as support for the necessary high cash-flow balance, a 2 billion increase in the short-term debt as commercial paper has been negotiated.

Acid test (quick ratio): The acid test ratio comes to show some key points. First of all, the company is in relatively good short-term liquidity position. Second, as the TA is 1.14, this indicates and very low liquidity dependence from inventories. which This is consistent with the overall business strategy of IBM. a And last the fact that there’s a strong difference between the CA ratios for 2006 vs. the one for 2007 – almost 0.1 . If we go further, a closer look at the numbers would show that this change comes not from an increase in assets and a decrease in liabilities. This would indicate an improvement in liquidity and an even better management of the inventories.again indicates the already stated financial support actions taken by the management, compared to the previous year.

Another thing that should be considered about IBM is that being internationally presented – ergo taking the risk of working in different currencies and also being a global borrower and lender - the company has accepted the use of some derivatives and hedging techniques to mitigate these risks. This at times can put it in a liquidity risks.

Long termLong termThe long term liquidity rations measure the extent to which the capital employed in the business has been financed either by shareholders or by borrowing and long-term financing.

NCF/DEBT: (Andrea please add it in the final XLS file – LT Debt is 23.039 acc. to me – ergo NCF/DEBT=0,70 for 2007 and 0.65 for 2006) The ratio chosen reflects a quite strong long term position regarding the debt. Obviously the company is taking advantage of its traditionally high cash flow balance for the past few years in order to raise the level of the debt. Normally this would increase the financial rigidity of the company. In the case of IBM the debt is negotiated on a relatively good terms as the maturity of major parts of it are postponed in the far future (3,545 million $ for 2012-2013, 3,026 million $ for 2014-1018) with very good rates for the interests ( 5.34% and 5.69% respectively).

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IBM AnalysisIBM Analysis

NCF/LT Liabilities: The ratio indicates certain financial reorganizations in IBM. These are the new long-term borrowings of at about 9.5 billion and the effect from adopting FIN 48 which accumulated tax reserves of at about 3 billion. This brought ae decrease of the ratio by 0.096% in the ratio compared from last year. In relative terms we shouldn’t read this as an indicator of rigidity and dependence because first as mentioned before the tax is very well negotiated and second the part of the tax reserves that will eventually be recognized is certainly a source of flexibility.ris due to the reinvestment of the cash surplus in new acquisitions and supporting the cash balance by an increase of the long term debt by almost 10 billion. This is possible due to the strong support the company policy gets from the stock market.

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IBM AnalysisIBM Analysis

Financial Structure AnalysisFinancial Structure Analysis

The financial structure of IBM appears to be quite rigid in terms of financial dependence independence ratios. For the last 2 years the values are at about 0, 76 vs. 0, 24 which reflects the fact that the company is working mostly with borrowed capital. In this case it is possible due to the fact that the core businesses it operates are with high margins which results in a relatively high ROA and ROE. This result in high interest in IBMs’ shares and respectively in strong support from the stock market.

The fact that a quite big part of the liabilities are non current gives IBM a relatively good financial and investment elasticity (0, 37; 0, 44). These are kept stable during the last years by the negotiation of a long term debt of 10 billion thus giving a strong support to the cash flow balance (a current asset). This is vital regarding the continuing policy of expansion. Nonetheless it should be noted that the company has a 28.789,00 billion in receivables which can be a reference for a a strong potential for improvement in the financial and investment elasticity.

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IBM AnalysisIBM Analysis

BenchmarkingBenchmarkingAs we said in the brief market analysis, we chose 4 companies to do the benchmark. Between them, Hp could be considered the most important and the most similar competitor to IBM; if we would have done this analysis next year (or, better, in 2 years to appreciate all the results) the acquisition of EDS by Hp would have even minimized the difference between the businesses and the structure of Hp and IBM. In the comparison we put also Microsoft because for dimensions, ability to innovate and strong position in some markets it is really relevant to evaluate IBM performances. The reasons for considering EDS and Sun are totally different: EDS is focused on services and in this field is the strongest competitor of IBM and in particular of its strong and powerful Global Services division. Considering the acquisition by Hp and all the future expected synergies between the two companies, EDS will probably further reinforce its role as IBM main global competitors regarding services provision. Finally Sun Microsystems is relevant to the goals of benchmarking because of its leadership in network computing infrastructure products which granted it huge growth, with an important and increasing contribution from services provision and technological implementation of its products.

ROEROEMicrosoft leads the challenge with an incredible 45% in return on equity that is the result of the monopoly position it has in many segments of operative systems and software creation. However IBM results are outstanding and the appreciable difference with Hp is probably to be related to the larger impact services, and thus their higher profitability, have in the value creation for IBM, while Hp core business is still hardware. From this consideration is even more valuable the acquisition of EDS, that is expected to fully integrate Hp core competences with the service orientation. From a ROE perspective, exactly the economic performances of EDS and Sun show that they were not so relatively profitable and we will try to find the reasons for this kind of results in the continuation of the analysis. Anyway, we have to say that it would been of higher value the possibility to compare Global Services (division of IBM for services) results with that of EDS and Sun but the level of detail of the data at our disposal is not sufficient to allow such an analysis: we are nevertheless convinced (obviously supported by some assertive sources such as “Il sole 24 ore”) that the comparison would show the low profitability of EDS and Sun.

ROAROA The return on assets is the main responsible together with the Average Net Cost of financing activities for the results previous commented; Microsoft still leads the way with an outstanding 29,3% that is mainly due to the low value of assets compared to the huge market capitalization. This is because of the value of intangible assets that is not valorized but consists of the largest part of value given by the stock market and it is amplified by the software/operative systems vocation that is highly brain-intensive. Regarding the followers, in the IBM-Hp challenge the Big Blue wins again but with a much lower difference from the main competitor, underlining a very good Hp ability to leverage on assets more effectively and efficiently, also thanks to the by now consolidated acquisition of Compaq and the following possibility of large economies of scale. At the bottom of the standings, EDS is relatively much more able to leverage on assets than Sun which reported a very low value; however the company is emerging from a period of deep crisis and the analysts look positively at the action taken by the management to solve the main problems linked to the low profitability of sales.

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IBM AnalysisIBM Analysis

Average Net Cost of financing activities (f)Average Net Cost of financing activities (f)As regarding financial activities, we can notice outstanding results by Microsoft and even Sun, that in this way almost cover the ROA problems to reach ROE results very closed to those of EDS, that on the contrary suffered from a higher contribution by financial interests, due to an increase in net foreign currency transaction losses of $24 million, interest rate swap revaluation losses and minority shareholding results . Both IBM and Hp reported moderate results with financing activities, even if Hp situation is declining in the last three years owing to higher interest expenses resulting from higher average debt balances that were partially offset in 2006 by a well-ended patent infringement with Intergraph.

Financial LeverageFinancial LeverageThe average value for the debt on equity ratio is very close to 1 for all the companies considered, except for IBM that as previously noted is quite rigid from this point of view. Till the stock market will continue to give its total trust to IBM the problem will remain a marginal one but with an increasing in competition, such as for example the acquisition of EDS by HP, it could represent a limit for IBM, even if a terrible advantage in case of good results on return on assets. In fact if we look at ROE the differences between IBM and Hp are in the order of 50% more in favor of IBM while IBM ROA is only 20% more than Hp’ s one.We can also consider some elements of the financial structure analysis to clarify the differences between the companies: IBM is the only one with a very low financial independence while for all the others financial dependence and independence are balanced; however this partially negative result is balanced by the fact that IBM financial elasticity is quite high thanks to a substantial balance between current and long-term liabilities. Almost the same is for Microsoft while Hp reported an outstanding value for financial elasticity thanks to a very virtuous low use of long-term liabilities.

Return of fiscal and discontinued operations (s)Return of fiscal and discontinued operations (s)None of the companies relied on strong extraordinary results, that is a sign of solidity but, most important, of sustainability in time of the actual results.

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