By Ronald Weisenstein
According to a Reuters report,
The move comes as IBM is shifting its focus from increasingly commoditized computer hardware to higher-margin software and services, particularly analytics, which help clients analyze market data to plot trends or prevent fraud.
The acquisition is only the latest buyout by a technology behemoth. In addition to IBM, Hewlett-Packard (HPQ), Cisco (CSCO), and Intel (INTC) have all made large purchases this summer. The companies have "announced new services and acquisitions in an effort to offer a broader set of technology services to clients," according to Reuters.
Yet a striking picture has emerged: all of the above companies have stocks that are languishing. Clearly, the moves are an effort to diversify businesses. Why haven't investors given a vote of confidence with their wallets?
First, let's look at IBM. The corporation has established itself as a "player" among technology companies. IBM delivers consistent profitability, and with $95 billion in revenue last year, it's hardly feeling the economic pain. Yet, the stock has traded in the $120-$130 range for the last year. There is a distinct barrier blocking IBM from reaching the upper echelon of market capitalizations.
IBM said in May that it planned to spend about $20 billion in acquisitions through 2015 to expand its software and services business. Markets appear to be hesitant, though, that the strategy will meaningfully grow future cash flows. If management can't convince weary investors that the company will advance higher, then the stock could remain range-bound for some time.
Looking to HP, Cisco, and Intel, all three companies are at or near 52-week lows. With ample cash holdings to create a "bang" in the M&A market, none have made moves that hugely impressed.
Despite a string of buyouts, HP has faced management turmoil after its CEO was ousted. The stock will not recover until markets are convinced that a new leader can take the helm and control the massive workforce.
Cisco is facing increasing analyst pressure, against the optimism of CEO John Chambers. According to the Wall Street Journal,
A few raised worries about the company's ability to hit its revenue goals, while plunging into new battlefields, dealing with heightened competition and a global economy that remains fragile.
Intel has spent the past few months on a buying binge. Shares have failed to advance, however, in light of news that there is an oversupply of computer chips. This indicates a weakness in the PC market, and bears have punished Intel as a result.
All in all, it appears that these technology companies are seeking to solve existing problems by buying new opportunities. 2010 markets aren't so easily distracted. A new generation of hesitant investors has emerged, and they won't part with capital until managements show that they're on the road to growth. So far, they have failed to do so.
Disclosure: No position