IBM will buy its growth

Acquisitions and a bigger focus on software and services will push Big Blue's growth, CEO Palmisano tells analysts.

By Charley Blaine May 12, 2010 2:42PM

Updated at 3:45 p.m. ET

 

So, how does IBM (IBM) see its growth in the next five years? By focusing on software and services and possibly as much as $20 billion in acquisitions, CEO Sam Palmisano told analysts today.

Operating earnings will jump to at least $20 a share by 2015 from $11.35 or more this year, helped by cost savings and software demand, Palmisano said.

The company also predicted sales growth that beat analysts' estimates. At 3:45 p.m. ET, shares had jumped 4.3% to $132.35 today, second-best among the 30 stocks in the Dow Jones Industrial Average ($INDU).  The move higher for IBM brought the stock to even on the year.

Palmisano signaled that his pace of acquisitions may be accelerating, Bloomberg News noted. He spent more than $20 billion on 100 purchases in the eight years since taking over in 2002, partly to focus on the higher-margin businesses of services and software. He has also bought back shares and cut jobs to make up for slowing corporate spending amid the recession.

IBM will keep investing in markets that help customers be more efficient, such as software that helps analyze or predict trends, and cloud computing, which lets them store and access information on shared servers, Palmisano said. IBM

The company is also developing services to monitor highways, electrical grids and other infrastructure so they can be run more efficiently.

The amount set aside for acquisitions will equal about $4 billion a year, Chief Financial Officer Mark Loughridge said at the meeting. The company's projections for 2015 assume about 5% in annual sales growth, he said.

Analysts surveyed by Bloomberg predict revenue growth of 4.3% this year, to $99.9 billion, after falling 7.6% last year. Analysts predict sales growth of about 4% also for 2011 and 2012. Hewlett-Packard

Hewlett-Packard (HPQ), the world’s largest computer maker, is projected to increase sales about 8% this year, helped by purchases such as its $2.7 billion buyout of 3Com and the $13.2 billion takeover of services provider Electronic Data Services.

Oracle (ORCL), which has spent about $42 billion in acquisitions since January 2005, will boost sales 17% this fiscal year, according to analysts’ estimates. Oracle

Sluggish growth is one reason IBM’s stock performance has trailed some of its peers. In the past five years through Tuesday, IBM shares had increased 73%, while Hewlett-Packard’s stock had risen 136%. Oracle more than doubled over the same period.

IBM plans to save $8 billion through productivity gains by 2015, while free cash flow should reach $100 billion over that span. The company said it plans to give 70% of the cash flow to shareholders.
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