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IBM Deal Drought Is Longest Since 2003, Cash at $11 Billion

IBM CEO Sam Palmisano
IBM Chief Executive Officer Sam Palmisano. Photographer: Andrew Harrer/Bloomberg

International Business Machines Corp. has hit its longest stretch without an acquisition in almost eight years, even as the company holds about $11 billion in cash on its balance sheet.

The company, which has made more than 100 deals in the past decade, last announced a purchase on Oct. 21, more than four months ago. That’s the longest period since May 2003, when an acquisition ended a five-month drought, according to Bloomberg data. If it lasts another 15 days, the dry spell would be the longest since Sam Palmisano became chief executive officer.

Palmisano has made more than $25 billion purchases in his nine years at the helm, steering the company toward software and services. IBM could have a flurry of deals next quarter after a surplus of purchases at the end of the year delayed deal-making, said Jeff Bistrong, managing director at investment bank Harris Williams & Co. in Boston.

“IBM is sitting on a lot of capital,” said Bistrong, who has sold companies to IBM. “They’re very interested in acquisitions. They have to put the capital to work.”

Ed Barbini, a spokesman for the company, declined to comment.

IBM, based in Armonk, New York, fell $1.04 to $161.39 at 4 p.m. in New York Stock Exchange composite trading. The shares had climbed 10 percent this year.

The company, the world’s biggest computer-services provider, announced nine deals in the second half of last year, including the $1.7 billion purchase of storage-maker Netezza Corp., the company’s largest deal since 2007.

$20 Billion in Acquisitions

The last six months of 2010 were active for the technology industry, with Hewlett-Packard Co. snapping up 3Par Inc. and Dell Inc. buying Compellent Technologies Inc. That’s made for a quiet first quarter for acquisitions, Bistrong said.

IBM has one of the most systematic approaches to deal-making in the industry, said Chris Whitmore, an analyst at Deutsche Bank AG. The company has an internal M&A team, led by former Morgan Stanley investment banker Eli Mendoza, and a standing committee for vetting deals that includes executives such as the head of research.

IBM has even broken down -- to the penny -- how much acquisitions should contribute to earnings per share by 2015: 90 cents out of the overall goal of at least $20 per share in operating earnings by that time.

“It’s been a key contributor to the success of the business,” said the San Francisco-based Whitmore, who has a “buy” rating on the stock and a price target of $200, the highest of any analyst tracked by Bloomberg. “I don’t know who does a better job of buying and integrating software companies than IBM.”

IBM Deals

IBM, which ended last year with $10.7 billion in cash and about $1 billion in short-term investments, has said it plans to spend about $20 billion on acquisitions through 2015. The company is ahead of the target pace for adding 90 cents in profit, after $6 billion in acquisitions last year, Chief Financial Officer Mark Loughridge said at the company’s investor briefing last week.

“We indeed are ahead of the game, and I think we have upside here,” Loughridge said.

Over the last decade, IBM has used acquisitions as part of its strategy to transition away from hardware and toward more profitable software and services. Its two largest purchases were for Cognos Inc., a maker of business-management software, in 2008 and PwC Consulting, a provider of business and technology consulting services, in 2002. Services now make up more than half of total revenue, and software will be about half of total profit by 2015.

M&A Timing

Palmisano is now investing in analytics software, which helps companies predict trends, and cloud-computing, which lets clients store and access data on servers other than their own. The two businesses should grow to be $16 billion and $7 billion in sales, respectively. He’s also spending on Smarter Planet, the company’s concept that any infrastructure -- from highways to utility grids -- can be digitally monitored and made more efficient.

IBM is extremely focused on those target areas and deals virtually always happen within them, said Whitmore.

There may be many reasons for IBM’s acquisition slowdown, from the number of deals last quarter to an inability to find anything to buy at the right price, said David Grossman, an analyst with Stifel Nicolaus & Co..

“M&A is a timing thing,” said San Francisco-based analyst. “They just think opportunistically.”

IBM only buys companies for intellectual property that the company can scale to its more than 170 countries and quickly make a return on investment, Loughridge said at the meeting. That approach has helped IBM spend about $28 billion on deals, compared with more than $43 billion each for HP and Oracle Corp. in the last nine years. The company’s largest deal was Cognos for $5 billion.

“I’m really focused on getting him his money back,” Loughridge said of Palmisano at the meeting. “Because when I don’t give him his money back, I’m going to have a very bad day.”

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