IBM Hits Record as Palmisano Focuses on Software, Services

International Business Machines Corp. rose to the highest level since it went public in 1915 as investors show support for Chief Executive Officer Sam Palmisano’s strategy of remaking the 99-year-old company.

IBM gained 88 cents to $138.72 at 4:01 p.m. in New York Stock Exchange composite trading, topping the previous record of $137.88, adjusting for stock splits, reached in July 1999. Palmisano has focused on services and software, making the company once known for mainframe computers into the world’s biggest computer-services provider.

Since Palmisano became CEO in March 2002, IBM shares have risen a third as he divested hardware units, including the personal-computer business sold to China’s Lenovo Group Ltd. in 2005. In May, he said he expects Armonk, New York-based IBM to almost double operating earnings to $20 a share by 2015, as he continues to focus on more profitable software and services.

The shares are also benefiting as investors predict corporate customers will invest in information technology, said Lou Miscioscia, an analyst at Collins Stewart Plc.

“There was a big concern investors had about IT succumbing to the macro slowing -- that was overblown,” said Boston-based Miscioscia, who has a “buy” rating on the shares and has the highest price target of any analyst tracked by Bloomberg, at $160. “Companies continue to want to invest.”

IBM has also boosted shares by buying its own stock. Since 2002, the company has spent more than $68 billion on buybacks, equal to almost 39 percent of its current market value.

Help From HP

Of the 26 analysts who rate IBM, 18 recommend buying, including nine who predict the stock will reach at least $150. Eight analysts recommend holding the shares and none recommend selling them.

The Dow Jones Industrial Average, which includes IBM, lost 19.07 points today to 10,948.58.

IBM shares are also likely gaining as investors leave its closest rival, Hewlett-Packard Co., amid uncertainty at the company, Miscioscia said. HP’s CEO Mark Hurd retired Aug. 6 after an investigation found he violated business-conduct standards. Last week, HP hired Leo Apotheker, former CEO of software maker SAP AG, to replace him.

“Given that the new CEO at HP has to prove himself, that does create more of a cloud of uncertainty,” Miscioscia said. HP shares have dropped 12 percent since the announcement of Hurd’s departure.

The company that became IBM was incorporated on June 16, 1911, as Computer Tabulating Recording Co. Created by a merger of three businesses, CTR sold items ranging from punched cards to cheese slicers, according to the company’s website.

Watson, Gerstner

Thomas J. Watson Sr., known as IBM’s founder, joined the company in 1914. He became president less than a year later, and began focusing on building large tabulating machines for businesses. In 1924, after expanding the company outside the U.S. and building other corporate machines, he changed the name to International Business Machines Corp.

By 1993, the company had posted three straight years of losses, including $8.1 billion that year. The company faced a possible breakup when IBM chose Lou Gerstner as its chief that year -- the first time IBM went outside the company for a CEO.

He helped increase the share price about ninefold by cutting thousands of jobs, keeping the company’s units together and marketing software and services along with hardware. Gerstner wrote a book about his experience called “Who Says Elephants Can’t Dance?”

IBM Investments

Palmisano continued the transition of what was once the world’s largest computer maker. The focus on software and services has helped expand IBM’s gross-profit margins more than 8.5 percentage points since he took over. He’s spent more than $20 billion on over 100 purchases.

In May, Palmisano said he plans to spend another $20 billion in acquisitions through 2015. Last month, IBM announced three acquisitions, including the $1.7 billion deal for storage- analytics maker Netezza Corp. and a purchase of software maker OpenPages Inc. for an undisclosed sum.

IBM is investing in markets such as analytics software, which helps companies predict trends, and cloud computing, which lets them store and access information on shared servers. The company is also developing services to monitor highways, electrical grids and other infrastructure systems to help them run more efficiently.

Increased sales of those technologies, along with growth in markets such as Brazil and China, will add $20 billion to revenue by 2015, IBM has said. The software segment, the company’s most profitable, will make up about half of total profit by then.

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

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.