Our recent 11-page report on the IBM software group by senior analyst Dennis Byron,Â is available on a stand-alone basis at Research and Markets.Â The direct link is here.Â
The first page summary is as follows:
— We believe software is a tactical holding action for IBM until the IBM â€œservicesâ€œ strategy is fully in play, rather than the software business being a strategic linchpin for IBM. IT-related business, technical and management services are the primary markets that IBM wants to participate in, and software simply provides a strong complement to the three. The growing importance IBM has put on its services businesses over the 2003 to 2006 timeframe means there might be no need for investors to watch the IBM software business separately.
— However IBM has said it wants software to contribute 50% of a corporate total $11 in earnings per share by 2011 (up from 40% of $6 in 2006). IBMâ€™s software revenue dominates the overall software market and represents over 20% of total IBM revenue. For that reason, this report examines IBM software as a separate entity.
— The IBM software group is growing more slowly than the software market average. Some of that underperformance can be attributed to the slowing growth rate of the companyâ€™s mainframe-dominated systems and technology group. Most of the underperformance is based on the fact that the IBM software groupâ€™s product portfolio is a mile wide and an inch deep. IBM needs to divest of some of its less exciting software businesses in the same way it has divested itself of the PC and printing divisions. Otherwise, the 2011 EPS objectiveâ€”to the extent it depends on softwareâ€”is in serious jeopardy.
— In terms of fundamentals, 35â€“40% of the IBM software group revenue flow has been acquired in the last three to five years rather than a result of organic growth. Almost every major software company acquisition has been a firm at its peak as an independent organization, making it hard for IBMâ€™s software group to realize any dramatic further growth from the acquired companies. Acquisition is a key component of corporate strategy, and as a result IBM is still looking to acquire in five of the six segments of the software market (see Figure 1) in addition to the services sectors of the IT market. IBM probably will not acquire an ERP supplier (the only software category in which IBM does not compete) so as not to compete with partners. But never say never. IBM might have to acquire ERP suppliers to protect part of its systems business (the AS/400 and successors) or enhance its business transformation services (BTS). — Dennis Byron