Whenever two parties enter into a major transaction, you often hear the phrase "win-win." After all, no one wants to admit to be on the losing side of a deal, and one would rarely accept a deal that seems like a loser. Yet, in the long run, more often than not a clear winner and loser emerges. However, the just-announced enterprise partnership (details available here) between IBM Corp. (NYSE:IBM) and Apple (NASDAQ:AAPL) actually looks like one of the rare true win-win agreements. For Apple, this is a defensive deal that should cement market share with longer-term upside, while IBM should see an immediate-term upside with defensive characteristics as well. I am more positive on both stocks, as a result.
Essentially, this deal ties IBM applications to Apple hardware. IBM will build exclusive apps and cloud services for enterprise on iOS (the iPhone and iPad). IBM will also sell, activate, and manage phones for its numerous enterprise customers. Essentially, IBM will now sell iPhones and iPads to enterprise with special IBM apps preloaded. These devices will now carry IBM applications that Android or BlackBerry cannot offer, helping to further differentiate Apple's offerings from competitors, while entrenching IBM into the ever-growing Apple ecosystem. IBM will also develop security applications for these devices, which is critical, as some more security-conscious customers had been wary of Apple's devices. IBM will also develop industry-specific apps, while Apple only has had the capacity for general apps. IBM's deep expertise will blend nicely with Apple's broad brilliance. So what are the ramifications for each company?
It is a popular refrain to say that Apple is a consumer company that has struggled to gain a foothold in enterprise. For many years, this has definitely been true, with Windows, PCs, and BlackBerry (NASDAQ:BBRY) dominating enterprise, but it has been changing swiftly. While consumer products are still Apple's core, enterprise is becoming a major part of its business. In early 2014, iPhone enterprise market share reached 59%, while the iPad stood at 78% (details available here). With the collapse of BlackBerry, businesses have slowly migrated towards Apple products, though they have still largely avoided Apple computers.
Now, it appears Apple has finally built a solid foothold in enterprise with these market share figures. In this sense, the IBM deal will not significantly boost sales, as market share gains from here may be limited. As such, this deal offers little immediate-term upside. It does, however, limit potential downside. The smartphone market is increasingly competitive, with Samsung (OTC:SSNLF) launching innovative products and Microsoft (NASDAQ:MSFT) doubling down on mobile. With its enterprise credibility, MSFT could be a threat to Apple's share. However, IBM's presence and exclusivity gives Apple total credibility and differentiation, and as a consequence, it is hard to envision Apple losing enterprise market share in phones and tablets. This deal effectively defends its position. In the long run, with the IBM partnership, Apple may be able to better integrate Macs into the workplace, but as this deal only includes iPhone and iPad, that is probably still years away.
In particular, Apple has struggled with a stigma that its phones were not as secure as BlackBerry, which has limited the iPhone's usage in government, defense, and some financial companies. By layering on the IBM security to the iPhone hardware, this concern is essentially nullified, which should help Apple pick up market share in these segments. By retaining market share in areas where Apple is strong and picking up share in new ones, Apple could easily see incremental demand of 5 million iPhones and 2 million tablets, which could increase annual earnings by about 2%. If Apple could see some lift to Mac sales down the road, earnings potential in five years would be about 10% higher, thanks to the higher selling price for computers. Investors should expect about a 2% bump in results as these offerings are fully rolled out. As such, this deal is not a total game changer, but definitely one that provides solid incremental growth. I would also note that Apple's gain will likely be pain for BlackBerry, once the king of enterprise. Consumers have been switching en masse to Apple for years, and with IBM's endorsement, more enterprises will follow suit.
From IBM's perspective, this deal entrenches its products into Apple's ecosystem. While IBM is the king of enterprise, it has lacked powerful mobile offerings, ceding that territory to other firms like BlackBerry. This deal places IBM squarely in mobile, with exclusive apps that can provide ancillary revenue. Its Apple partnership also differentiates it against enterprise competitors like Oracle (NASDAQ:ORCL), Cisco (NASDAQ:CSCO), and Hewlett-Packard (NYSE:HPQ), which have muddled mobile strategies. If these firms had signed the deal instead, IBM's position in enterprise would have been more tenuous. Instead, IBM continues to be the firm with the richest enterprise offerings, with an exclusive and powerful mobile partnership for the first time.
IBM has struggled specifically in its servers business and overseas over the past 12 months. NSA spying revelations and slowing growth in emerging markets have cut demand from BRIC nations by upwards of 20%. Most of these troubles are on the hardware side, so this partnership is unlikely to directly help, though there could be a very mild halo effect. Instead, I expect to see IBM's software business, which offers higher margins and faster growth, accelerate a bit on this news, as IBM software will be paired with the Apple hardware. In particular, Oracle could face the biggest threat, as it derives the majority of its earnings from software. This space is extremely competitive, and Oracle struggled last quarter, before this partnership was announced. With IBM having this exclusive product, it could be positioned to take even more share from Oracle. With some market share gains, I expect IBM to see an income boost of 0%-3%.
As such, both sides are winners in this partnership. Apple and IBM are better equipped to defend their respective market share with the potential for some growth. With the IBM name, Apple could win over some final wary enterprises and has the potential for longer-term growth in the Mac for enterprise. IBM finally gets a foothold in mobile and has offerings that distinguish it from competitors, which will help it maintain market share. While both companies benefit, I do think AAPL is a better investment from here, as it has a cheaper ex-cash multiple with a higher growth rate. Nonetheless, enterprise competitors should take note: Apple and IBM are teamed up, and they may be unstoppable.
Disclosure: The author is long CSCO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.