The hallmark of a good company is its ability to adapt to new circumstances. International Business Machines is one such master of adaptation, having evolved from a merger of time-clock companies in 1911 to the global software giant of today.
The company is transforming again, moving into cloud computing, artificial intelligence, and Blockchain applications. IBM’s plan is to integrate these processes into end-to-end services that help companies plan, build, and manage their information technology infrastructure.
IBM (NYSE:IBM) operates in 175 countries and gets 60% of its revenue outside of the U.S. It had an R&D budget of US $5.8 billion in 2018, which was approximately 7% of revenues. R&D is a hidden asset because it creates a pipeline for new products and services. IBM was awarded more than 9,100 patents in 2018, more than any other company for the 26th consecutive year. It is also a dividend leader. It raised its dividend in 2018 for the 23rd consecutive year.
In October, 2018 IBM offered US $34 billion to buy Red Hat, an open source software firm. It followed Microsoft’s smaller purchase in June, 2018 of GitHub, a similar software repository. Open source software is released under a license which lets users make changes and distribute it.
Both Microsoft (NDQ:MSFT) and IBM are adding to their cloud computing abilities with the acquisitions. Github and Red Hat are leading cloud-based developers. These systems let customers store and access files and programs on Internet servers.
Microsoft continues to gain from its 2014 strategic shift to cloud-computing services, called Azure. This has stopped the sales erosion of Microsoft Office by moving it from a one-off purchase to an online subscription, renewable each year. As more companies turn to cloud computing for data storage, Microsoft is growing with the trend.
Red Hat is IBM’s biggest acquisition. Given IBM’s market capitalization of $107 billion, it is a sizeable bet. It increases IBM’s long-term debt considerably and so IBM will pause share repurchases in 2020 and 2021.
BM paid a 60% premium to market for Red Hat and is betting that after five years of slow growth it can turn itself around with the help of a bigger cloud footprint.
The purchase gives Red Hat’s products the power of wider distribution through IBM’s sales staff. Open source software is released under a license which lets users make changes and distribute the software.
The initiative helps IBMs expand its growing presence in artificial intelligence (AI) and its Blockchain initiatives.