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August 30, 2010
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International Business Machines Corp. (IBM) completed the acquisition of AT&T Inc.’s (T) Sterling Commerce unit. As previously announced in May 2010, IBM signed a definitive agreement to buy Dublin, Ohio-based Sterling Commerce for $1.4 billion in cash. AT&T expects to record a gain of about $800.0 million in the third quarter 2010 as a result of the sale.
Organizations across the globe are looking for different ways to improve communication between business partners, customers and suppliers. The acquisition expands IBM’s ability to help clients improve their communication with customers, partners and suppliers through dynamic business networks, using either physical or cloud delivery models.
We believe Sterling Commerce is an important asset for IBM’s expanding middleware portfolio. The acquisition will enable IBM to deliver powerful new cross-channel solutions to its diversified client base that includes large companies from retail, manufacturing, communications, health care and banking industries.
Sterling Commerce has more than 18,000 global customers, including large enterprises such as Boston Market, Honeywell International Inc. (HON), Monsanto Co. (MON) and Pitney Bowes Inc. (PBI). The company facilitates more than 1 billion business interactions currently, which IBM expects to increase significantly, going forward.
Following the closure of the acquisition, approximately 2,500 Sterling Commerce employees will be integrated within IBM's Software Group. We believe the acquisition of Sterling Commerce unit will boost IBM’s customer base going forward, driving a strong profitability over the long term.
IBM continues to proceed with its strategy of accretive acquisitions that can be easily integrated into its current business. Recently, IBM acquired marketing services company Unica Corp. (UNCA) for a whopping $480.0 million, which is expected to expand IBM’s software business, its most profitable division.
IBM plans to spend approximately $20.0 billion in acquisitions over the next 5 years.
We anticipate that IBM will continue to acquire companies with a higher intellectual property, particularly in the software segment going forward.
Although IBM benefits from a strong liquidity position, operational efficiency, substantial free cash flow and earnings momentum, the company faces stiff competition from Hewlett Packard Co. (HPQ), Accenture Plc (ACN), Oracle Corporation (ORCL), VMware Inc. (VMW), Google Inc. (GOOG) and Microsoft Corporation (MSFT) in most of its markets.
We maintain a Neutral rating on a long-term basis (6–12 months).
IBM has a Zacks Rank of 3, which implies a Hold rating on a short-term basis (1–3 months).
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