May 12, 2010 8:17 pm

IBM sets out bold buying strategy

IBM will spend $20bn on acquisitions over the next five years, chief executive Sam Palmisano said on Wednesday.

“In five years we will spend more in acquisition than we did in the previous 10,” Mr Palmisano told analysts gathered for the company’s investor day.

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IBM has already stepped up the pace of acquisitions in recent months.

During the first quarter it spent $1bn in cash, buying mostly smaller companies and putting it on track for the $4bn a year it would need to spend to hit Mr Palmisano’s target.

Acquiring new companies would provide IBM with additional paths to growth, good news for a company whose core businesses of consulting and software are largely matured.

Software, analytics and software as a service (SAAS) are expected to be a focus of IBM’s buying spree.

The company talked about its evolving “cloud” strategy at its annual software conference in Las Vegas last week. Its customers are showing more interest in having their applications and services run remotely for them over the web – so-called cloud
computing.

Last week, it bought privately held Cast Iron Systems to help integrate different cloud applications and service providers.

A buying spree would also relieve IBM of the more than $14bn in cash and marketable securities it had amassed in recent years.

Other large tech companies, including Microsoft, Cisco and Oracle, have also hoarded cash through the downturn.

Mr Palmisano said the aggressive buying strategy would be made possible by what he expected to be “at least $20” earnings per share by 2015, which would generate $100bn in free cash flow during the same period.

The chief executive’s forecasts were part of a “five-year roadmap” IBM presented to investors that assumed 5 per cent compound revenue growth over the five-year period.

The timeline continues IBM’s habit of making detailed forecasts. In May 2007 it introduced a three-year plan to achieve $10 per share by the end of 2010. It hit that target one year early, at the end of 2009. The group now expects EPS of $11.20 for the full fiscal year.

Mr Palmisano has overseen more than 100 purchases during his time as chief executive. The largest of those was the $3.5bn purchase of PwC Consulting in 2002, a deal that bolstered IBM’s services division but has been marred by choppy integration and a more competitive outsourcing market.

The second-largest purchase under Mr Palmisano was also for a services company, the $1.3bn purchase of Internet Security Systems in 2006.

It spent $1.5bn in the 2009 calendar year, with $1.2bn of that spent on SPSS, the business analytics group.

IBM will be 100 years old next year. From its origins as a vendor of meat slicers and scales, it has become the world’s largest consulting group and third-largest software company.

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