IBM's Palmisano Plans to Spend $20 Billion on Takeovers in Next Five Years

International Business Machines Corp. Chief Executive Officer Sam Palmisano, seeking to boost earnings by focusing on software and services, said he plans to spend $20 billion on acquisitions in the next five years.

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 in a meeting with investors in New York today. The company also predicted sales growth that beat analysts’ estimates, sending the stock higher.

Palmisano is signaling his pace of acquisitions may be accelerating. 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. The company is also developing services to monitor highways, electrical grids and other infrastructure so they can be run more efficiently.

Photographer: Paul Morse/Bloomberg

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Photographer: Paul Morse/Bloomberg

IBM plans to spend $20 billion on takeovers.

IBM, based in Armonk, New York, climbed $4.46, or 3.5 percent, to $131.35 at 12:27 p.m. in New York Stock Exchange composite trading. It earlier rose as high as $131.75 for the biggest intraday gain since July 17. The world’s largest computer-services provider’s shares had fallen 3.1 percent this year before today.

Trailing Competitors

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

Analysts predict revenue growth of 4.3 percent this year, to $99.9 billion, according to the average of estimates compiled by Bloomberg, after falling 7.6 percent last year. Analysts predict sales growth of about 4 percent also for 2011 and 2012.

IBM won’t make acquisitions just to boost sales, Loughridge said. The company wants a return for its investment, he said.

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

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

Rewarding Shareholders

Sluggish growth is one reason IBM’s stock performance has trailed some of its peers. In the past five years through yesterday, IBM shares had increased 73 percent, while Hewlett- Packard’s stock had risen 136 percent. 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 percent of the cash flow to shareholders.

To contact the reporter on this story: Katie Hoffmann in New York at khoffmann4@bloomberg.net

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