It comes as no surprise that IBM agreed to acquire CSL International for IBM's zEnterprise system. Clients wanted to take advantage of Linux on system zEnterprise, but they were constrained by technical issues and cost. This need forced IBM into looking for solutions. CSL was a leading provider of virtualization management technology for IBM and could provide answers. IBM decided to acquire the company and expand its cloud virtualization capabilities. The effort will enable it to increase revenues in a cloud business that grew 80% year over year.
The acquisition would coincide with other boosts in revenues that the company has witnessed. It recently announced that its business analytics revenue grew by 7% in the first quarter. This came as UBS upgraded IBM to a buy status and raised its price target from $210 to $235. The news is made better considering that IBM's net income was flat in the recent report. The drawback angered some analysts, but IBM is still coming out with strong numbers.
Benefits of acquisition
Those familiar with zEnterprise system will note that it enables clients to host workloads of thousands of commodity servers in a single system. But clients had been creating smarter computing environments. IBM needed to move with the trend. Clients can expect that the acquisition will enable zEnterprise System to meet their expectation. An improved zEnterprise System will be welcomed by customers who have used the solution. IBM will deepen its cloud capabilities.
IBM's closest peers are Microsoft (NASDAQ:MSFT), Accenture (NYSE:ACN), and Hewlett Packard (NYSE:HPQ). But can IBM outpace them? Microsoft and Cisco recently announced a partnership to provide private cloud solutions to help public companies rapidly increase their number of users. Microsoft is also working with Cisco to stimulate hundreds of private cloud and hybrid cloud deployments worldwide. If Microsoft becomes prominent in the virtualization management sector, it will certainly hurt IBM. At a forward PE of 10.61, IBM is cheaper than Microsoft (11.88). A competitor like Hewlett-Packard is also cheaper than Microsoft at a forward PE of 7.14. However, Accenture is more expensive at a forward PE of 16.86. Microsoft offers a dividend yield of 2.00%, compared with 2.10% for Accenture and 2.20% for Hewlett-Packard.
There is no doubt that businesses will pay for a much improved zEnterprise system. Accenture wants to frustrate this possibility. It recently pledged to invest more than $400 million in cloud capabilities to help clients implement digital technologies. The move will also enable clients to get the most business value from the cloud computing sector. With Accenture's new initiative, it has the potential to slow IBM's growth in the enterprise sector. But it is the most expensive among the four competitors. At a dividend yield of 1.50%, Oracle offers less payout than Accenture. At an impressive growth estimated to average 10.53% in the next five years, Accenture will grow faster than Microsoft (8.26%) and Hewlett Packard (0.00%), but slower than Oracle (10.62%).
Hewlett-Packard is also progressing in its cloud computing ambitions. The company is shifting its focus to the high margin cloud computing space. It recently witnessed some wins in emerging markets like Brazil, Russia, India, and China. With an improved zEnterprise System in the market, Hewlett-Packard could find it more difficult to convert customers to its cloud solutions. However, at a dividend yield of 2.20%, it offers the highest payout among the four rivals. It is also the cheapest among the four companies.
IBM will enter into another period of profitability with the acquisition of CSL International. The combination of CSL and IBM will allow clients to manage many aspects of cloud-based solutions. Wall Street currently holds an average price target of $220.26 on IBM, which represents close to a 12% upside from current levels. Of the hedge funds I tracked at Insider Monkey, the size of capital committed to IBM has shown growth. Some of the most bullish money managers invested in the stock are Warren Buffett, Roger Keith Long, Christopher Zepf and Brian Thonn. With the new acquisition, IBM stands to remain a leading service provider that will take the internet to another level.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.