MBC607 m001 group8_ibm_v8 IBM vs Oracle

MBC 607_M001_Group 8 IBM Boer Chen, Yutao Tan, Shuai Wang

a. Justify your choice of specific benchmarks.

Chart 1: IBM Business Unit At A Glance

Business Unit Key Products and Solutions Key Competitors Global Technology

Services – GTS Information technology infrastructure

and business process services Accenture, HP Enterprise

Services Global Business Service – GBS

Business Consulting and Application Management Services

Software Group – SWG

Middleware software to integrate systems, processes and applications,

operating systems software

Oracle, SAP, Microsoft

System a& Technology Group - STG

Business computing power and storage capabilities: Servers, Storage

Oracle (SUN), EMC, Dell, HP

Global Financing - GF Facilitates clients' acquisition of Co.'s systems, software and services

Not examined -small revenue portion*

Based on the information collected, IBM core business consists of four main Business

Units and per each specific field there are competitors (see Chart 1). But there is not 1

single key competitor that is comparable with IBM in all four categories. Accenture is a

strong leading competitor in Global Service industry, however they are well known for

consulting service solely; they don’t produce Software or Hardware. Microsoft is

considerable in terms of total revenue scale; however the compete is mainly on enterprise

level Software and they basically have full product line/solutions comparable with IBM

Software Group. So are the same cases to EMC and Dell, their business focus on

Hardware. We have to exclude all the Consumer Business Factors because IBM is only

dealing with B2B now.

Only Oracle in this sense is kept due to the similarity of its business structure with IBM

(See Chart 2 and 3). It was Software focused company, esp. in Database field; however

the acquisition of Sun made it an End-to-End total solution provider like IBM. Despite


the fact that revenue size of Oracle is only 1/3 of IBM (Chart 4), we still consider it here

as the main competitor throughout the whole analysis.

So according to Mergent Online the Business Segment Part, we decided to exclude the

Global Financing BU out of our whole analysis report due to its small portion of revenue

in later report (See Chart 2). GTS and GBS are combined into one BU as “Service” for

convenience.

Chart 4: IBM VS Oracle in Revenue Scale and Breakdowns by BU.

b. Analysis Regarding Profitability:

As stated before, we chose Oracle as our major competitor. Let’s first examine the

Profitability Ratio of Year 2013 of the two companies.

Ratio IBM Oracle Gross Profit margin 48.1 61.2 Net Profit margin 15.9 29.4

Return on Investment 14.1 13.6 Return on Equity 84.7 24.5

Lower Gross/Net Profit margin indicates that IBM has a relative high cost of goods sold

and operating expenses. This is because that IBM is transforming into an integrated

corporation, of which major revenue comes from Service, while Oracle relies mainly on


its software business. Obviously, the margin of software is much higher than that of

services. For example, IBM’s single gross margin of services is 34.1% and its gross

margin of product sales is 68%. The services cost of IBM covers 37.5% of the total

revenue, compared to 9% in Oracle. The profitability difference is also reflected in the

total asset turnover ratio, with nearly half the profit margin, IBM’s asset turnover is one

time higher than that of Oracle. In a word, the disparity in above numbers could be

explained by the difference in business structures.

Besides, the two companies have similar ROI but IBM’s ROE ratio is more than two

times as that of Oracle. This is surprisingly high compared to the tech industry average

which is similar to Oracle’s ROE. Partially we conclude that is because the new CEO of

IBM constantly stressed the importance of stockholders’ equity and IBM’s unique

financing structure (which will be illustrated in part c).

Looking vertically, for the past five years, IBM demonstrates a steady growth in net

income of 7.84% per year, which aligns with its growth share of services revenue. Such

trend supports its strategy in developing its Global Services segment as stated in Finance

Report.

c. Analysis Regarding Risk: Short Term and Long Term

2012 2011 2010 2009 2008

IBM Current Ratio 1.13 1.21 1.19 1.36 1.15

Debt to Capital Ratio 0.64 0.61 0.55 0.54 0.72

Oracle Current Ratio 3.24 2.6 2.76 1.84 2.03


Industry Current Ratio 1.93 1.93 1.83 1.97 1.65


source: http://www.stock-analysis-on.net/

Compared to Oracle and industry average (general data for technology industry), IBM is

less competent to meet its short-term obligations. IBM’s cash ratio, quick ratio and


current ratio are all much lower than Oracle’s and industry average. Although the current

ratio has been below the 2:1 rule of thumb throughout years, totaling 1.13x in 2012, IBM

still manages to maintain its liquidity at satisfactory levels given its significant

acquisition strategies as well as ongoing investments in RD&E and in fixed assets, thanks

to its ability to generate strong revenue. Its relatively high liquidity risk is mainly due to

its risky financing structure, with the majority of its capital coming from borrowing.

When it comes to long-term liquidity risks, situation is more complicated because IBM is

highly leveraged. First, IBM’s debt to capital ratio is significantly higher than Oracle’s

and the industry average, with 0.64 compared to 0.29 of Oracle’s and 0.21 of industry

average at the end of last financial year. Second, IBM’s financing structure went through

big changes in recent years. In 2008, its debt to capital ratio was 0.72, which dropped

sharply to 0.54 in 2009, indicating that the financial crisis changed IBM’s financing

structure tremendously in 2009. However, its debt to equity ratio has been steadily

climbing since then and reached 0.64 at the end of 2012. Meanwhile, Oracle’s financing

structure has remained largely stable. Oracle’s debt to capital ratio remained between

0.27 and 0.32 from 2009 to 2013. This indicates that financial crisis had much less impact

on Oracle than on IBM.

However, IBM’s interest coverage ratio is noticeably higher than Oracle’s and slightly

higher than industry average. The ratio peaked at 52.1 at the end of 2011, while Oracle’s

ratio has been fluctuating below 20. Considering IBM’s much higher debt-to-capital ratio,

this shows IBM has a much stronger ability to generate revenue.

Overall, this is not good news for IBM. Compared to Oracle and industry average, IBM

has much higher short-term and long-term liquidity risks because debt is its major


financing source. Despite this, IBM’s strong service department can generate high

revenue, explaining its high ROE and resulting in a satisfactory interest coverage ratio.

d. Evaluate the soundness of your own analysis

If we had more time and resources we will breakdown IBM finance statement with

different BU Perspective, and compared each BU data with its industry competitors. For

example, IBM Services vs. Accenture; Software vs Oracle or Microsoft; Hardware vs.

EMC. One possible way of designing an overall industry benchmark is to calculate by

each part’s weight but we hold it will be of little meaning doing that.

As stated in part b and c, IBM’s new CEO Ginni Rometty has carried out a lot of new

policy changes after her onboard in 2011. Profitability and Investment Relationship have

been addressed in her CEO letter announced in Y2012 annual report. There’s a steady

strong growth on ROE in the past 5 years. The 2012 ROE is way higher (4 times) than

B2B Tech industry benchmark. IBM is on its way to a “Business Machine” to assure

all the shareholders. All internal signs indicate a continued focus on workforce cut,

lowering skills, slashing R&D, eliminating innovation. Regarding risks, IBM is risky in

terms of liquidity and nonetheless competent in terms of profitability. However, if IBM’s

revenue fluctuates greatly in the future, which is highly possible based on past

experiences, it will be hard to cover high interest expenses.

On the other side, speaking of intangible value, the last breathtaking innovation from

IBM we could recall was the super computer Watson dated back to 2011. We could

foresee a high profitability IBM with assured shareholders, but we also have witnessed a

continued falling trend on the most Valuable Brands ranking, from No.2 in 2010 to No.4

in 2013. When the Blue Giant stops innovating, is it still IBM? (-END-)


Appendix:

Chart 2: IBM Business Analytics as of Dec.31,2012, by BU view.

* International Business Machines Corp. (NYS: IBM) Revenues Portion

Report Date 12/31/2012 12/31/2012 Currency USD USD Scale Thousands Thousands Global Services 58,802,000 56.58%

Software 25,448,000 24.49% Systems & Technology 17,667,000 17.00% Global Financing 2,013,000 1.94% Total 103,930,000 100.00%

Chart 3: Oracle Business Analytics as of Dec.31,2013, by BU view.

Oracle Corp. (NYS: ORCL)

Revenues Portion Portion Report Date 05/31/2013 Currency USD Scale Thousand

s

New software licenses & cloud software subscriptions 10,350,000 27.78%

73.84% New Software Licenses - Software License Updates & Product

Support 17,156,000 46.05% Hardware Systems Products 3,033,000 8.14% 14.39% Hardware Systems Support 2,327,000 6.25% Services Business 4,387,000 11.78% 11.78% Consulting -

On Demand - Education - Total 37,253,000 100.00% 100.00%

Chart 5: Liquidity Comparison of IBM, Oracle, and Industry Average,

source: http://www.stock-analysis-on.net/

IBM Short-Term Liquidity 12/31/2012 12/31/2011 12/31/2010 12/31/2009 12/31/2008

Cash Ratio 0.26 0.28 0.29 0.29 0.30


Quick Ratio 0.96 0.98 0.98 1.13 0.95 Current Ratio 1.13 1.21 1.19 1.36 1.15 Net Current Assets % TA 4.87 7.56 6.66 11.86 6 Long-Term Liquidity LT Debt to Equity Ratio 1.28 1.14 0.95 0.97 1.69 Total Debt to Equity Ratio 1.76 1.56 1.24 1.15 2.52 Total Debt to Capital Ratio 0.64 0.61 0.55 0.54 0.72 Interest Coverage Ratio 48.72 52.1 54.6 46.12 25.84

Oracle

Short-Term Liquidity 05/31/2013 05/31/2012 05/31/2011 05/31/2010 05/31/2009 Cash Ratio 2.50 1.99 2.03 1.26 1.38 Quick Ratio 2.97 2.41 2.5 1.64 1.86 Current Ratio 3.24 2.6 2.76 1.84 2.03 Net Current Assets % TA 35.23 31.45 33.97 20 19.89 Long-Term Liquidity LT Debt to Equity Ratio 0.41 0.31 0.37 0.37 0.37 Total Debt to Equity Ratio 0.41 0.38 0.4 0.48 0.41 Total Debt to Capital Ratio 0.29 0.27 0.29 0.32 0.29 Interest Coverage Ratio 18.58 18.08 15.24 12.06 13.57

Industry,Technology

Short-Term Liquidity 12/31/2012 12/31/2011 12/31/2010 12/31/2009 12/31/2008 Cash Ratio 1.14 1.13 1.05 1.13 0.84 Quick Ratio 1.63 1.62 1.53 1.62 1.32 Current Ratio 1.93 1.93 1.83 1.97 1.65 Long-Term Liquidity Total Debt to Equity Ratio 0.26 0.28 0.26 0.22 0.27 Total Debt to Capital Ratio 0.21 0.22 0.2 0.18 0.21 Interest Coverage Ratio 44.82 50.23 51.94 41.8 47.5