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Nati Harnik / AP
Billionaire investor Warren Buffett speaks in Omaha, Neb., Monday, Nov. 14, 2011.
Warren Buffett made waves when he revealed Monday that he's purchased some 64 million shares of IBM that give him a 5.5 percent stake in the company. "They've done an incredible job," Buffett told CNBC, adding that he wished he'd started paying attention to the company five years ago.
Buffett isn't a typical tech investor, but IBM's not a typical tech company, either. Buffett's $10.7 billion investment is as much a prediction about the economic recovery and the evolution of enterprise technology as it is a vote of confidence in the company itself.
"What I think he's probably looking at is over 80 percent of total revenues and 90 percent of profits come from recurring revenue sources," said Brian Marshall, senior managing director at ISI Group. He added that IBM does a good job redistributing this largesse back to shareholders in the form of dividends and stock buybacks. "In the most recent quarter, they returned $4.3 billion to shareholders," Marshall said, pointing out that IBM's 1.6 percent return is better than the current rate on seven-year U.S. Treasuries.
That's impressive, but that's not the only reason Buffett wanted to get his hands on the stock. He spoke in his CNBC interview about being impressed by the company's road map for its future. Evercore Partners analyst Robert Cihra told CNBC on Monday that IBM is reaping the benefits today of its decision more than a decade ago to shift its focus from lower-margin businesses like hardware. Now, the $6 billion annually it spends on R&D targets solutions for businesses looking to use technology to improve marketing and sales.
But Big Blue is bumping up against the limits of how big an old-school tech company can get. ISI's Marshall called the size of IBM's geographic footprint and its reach into emerging markets the company's "secret sauce." But he said it will have a harder time generating big growth numbers in more mature markets like the U.S. "It's only top-line single-digit growth recently," he said.
Its edge is that IBM understands much better than other technology companies how computing is evolving and moving into spaces beyond its traditional IT-department turf, said R "Ray" Wang, principal analyst and CEO at Constellation Research. "We see IT department budgets dropping 5 percent yearly," he said. "But more importantly, when we look at our spending data, tech spending is up 18 to 22 percent."
Sales, marketing and other corporate operations are setting up cloud projects and investing in high-tech solutions for everything from integrating social media into interactive marketing to incorporating online and mobile sales channels into brick-and-mortar store inventory management.
Wang calls this movement the "consumerization of IT" and says it has big implications for IBM. He says events like IBM's 2010 purchase of CoreMetrics are evidence that the company is leaving the server room and venturing into other departments. "That's what I think Buffett sees, is IBM is playing in both the business side of the house as well as the IT side of the house," he said. By contrast, "Oracle and Microsoft have been focused just on IT."
"They're going after tough business problems," Wang said. "They're doing it at a higher level."
Insight on why Warren Buffett, Berkshire Hathaway chairman/CEO has bought about $10.7 billion in IBM stock and 64 million shares of the company this year.
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That's nice. It is wonderful that Buffet believes so strongly in India Business Machine. Too bad they don't believe in American workers anymore.
Totally...IBM came in and offshored my job along with the rest of our IT department. We spent 2 months training people over the phone and web in India how to do our jobs with IBM "helping" facilitate the process. How wonderful that Buffet is so into this business model.
Why would IBM keep paying 4 times the wage for semi-skilled labor for a job when others are willing to do it for so much less? Do you feel guilty when you are price-shopping at department stores?
Actually, the Chinese that bought out IBM now Lenovo.
http://news.asianstudies.dk/2009/02/lenovo-a-chinese-company-gone-global/
Buffet is sheltering his wealth in Blue Chip stocks such as IBM in anticipation of the 2nd Crash. Don't be fooled by the all the fancy talk.
Who does?
Yeah, Buffet makes a $10B investment into an American company. That's a reason to whine. Get a life.
Rick - IBM is a Global Company, has been trashing American Workers for decades. I should know, I worked for them for 10 years. My whole division was sold. Most of the labor is over-seas now. Anyone who thinks IBM cares for the United States needs to research the company.
In fact here is some info for ya' Hell, you can make IBM India your Google home page.
Add "ibm in india" section to my Google News homepage
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Buffett builds $10.7 bln stake in IBM
Better quality work for cheaper.....do you not compare prices and quality when choosing a plumber or mechanic? What kind of sick wealth-envy would make you feel IBM try to compete is "trashing" anyone?
IBM was formerly called International Business Machines. Obviously they are now International and no longer business machines. Buffett understands the direction in which business is headed and he expressed confidence in IBM because of their execution of their 5 year plan. IBM is a great American company with great growth in emerging markets.
I would purchase their stock if I had the money. I know from personal experience that 'Big Blue' has a lot of muscle and uses it. Between 03 and 07 their headcount in India grew 800%. I lost my job in 05. Yes - their focus on emerging markets has been the key to their success. In fact - they were moving some laid-off workers from the United States to India.
This is great news for billionaires like Warren however is not good news for tech in the United States. I know people who went from 80K+ to working for Comcast at 30K. The middle-class is going to look much different in a decade.
Those are the people who do not stay ahead of the IT knowledge curve.
I have been in IT for 30 years, and I learned long ago that you have to constantly chase the skills that are in rising demand in order to maintain your standard of living, not stagnate with skills that have a shrinking demand with a limitless supply from India.
Warren Bates did not create the wage drops; poor personal decisions did.
Sounds about like what DEC revenues were toward their end. DEC? Consumed by Compaq. Consumed by HP.
When DEC closed it had recurring sales on SW and HW support licenses and contracts. They had a distribution network. Who is big enough to buy IBM? China who???
Hey Warren, Americans could use some of the jobs American money creates.
It's so easy to be smart when money is no object!
It is smart to put yourself in a position to have the choice
He should buy into "DigitalGlobe, Inc," (DGI), now there's an upcoming company.
Buffets a bit behind on this one.. just look at the stock price over the last 18 months. He could of owned 10% of the company if he'd of bought when IBM lay'd it's 5yr plan back then. Not saying IBM stock won't go up, it prolly will. But the company makes it money now by spending cuts, moving it's workforce to China, India and Brazil, not by actual growth.
Nonsense. They are abandoning manufacturing all together, because IT hardware is a ultra-low margin commodity now. Manufacturing in the US, with the massive tax burden, blackmailing unions, and ever-increasing, politically-correct regulation is impossible - as Steve Jobs related to president Obama.
They are now focusing on specific services - services not easily duplicated in India.
''They are now focusing on specific services - services not easily duplicated in India.''
You couldn't be more wrong with that comment ..... all levels of Services are being duplicated with new offerings being created in both China and Brazil.
You want to see job creation? Take a look at either of those country's, for every PS job opening / creation in the US, there's 200 in Each of those. and that's no stretch!
Completely wrong - I am currently working on my third project the Wipro of India no-quoted on. I have three other clients that are bringing projects back from India due to cultural differences.