IBM Corp. reported stronger-than-expected fourth-quarter earnings on Thursday, helped by its lucrative software and services segments, both of which saw higher revenue. Hardware revenue declined, and IBM’s overall revenue fell slightly short of Wall Street’s expectations. Still, the company’s 2012 guidance was solid, and IBM said it is “well on track” toward its long-term goal of at least $20 per share in adjusted earnings for 2015.
In a conference call about the earnings report, Chief Financial Officer Mark Loughridge answered an analyst’s question about acquisitions in 2012.
QUESTION: Mark, you highlighted on this call a number of important areas that IBM is taking (market) share, which highlights the expanding distribution and the focus on value-added offerings. You also commented that the return on recent acquisitions has been the best you’ve seen in some time. So I wonder why not be more aggressive on acquisitions in 2012 relative to what was a pretty quiet year in 2011, and frankly even potentially get more aggressive than you were in 2010 when valuations were high in some sectors?
ANSWER: I think that’s a very fair question. I still think the best guide over the longer period … we had said that in the 2015 timeframe that we saw about $20 billion of acquisition spend. In that specific calendar timeframe, we’ve only done about $1.8 billion. I still think the $20 billion is a realistic number.
We are pretty tough on the financial returns in the cases. We’re very, very tough on that. If it doesn’t make very strong financial sense, then we’re either going to hold or we’re going to walk. And there have not been exceptions to that rule, at least since I’ve been in the job. Consequently, we’re there to perform against those. Now when the market gets more reasonable on a price level, we’ll move in, in a bigger way. And when it gets pricier, we’ll peel back.
In 2010, I thought prices were pretty reasonable. We had a lot of good candidates. We did 17 acquisitions, as I’ll remind you. Things got a little frothier as we went into 2011. We did pull back, but we still had some very strong acquisitions. You’ve seen in the fourth quarter we had about four acquisitions. We’ve already done three this year. Within that, one aspect of that improving performance, I think, and I can’t give you a precise variance analysis on it, but we built a tool with research based on the analytic performance and all of the acquisitions that we’ve done since 2000. You’ve got to imagine; that’s a pretty rich database to drive that.
So now when we go in and do due diligence in an acquisition, we use that analytical tool. This is called eating your own cooking. We use that analytical tool to improve our performance. So when you do an acquisition, you’ve got to put that team on the ground. We now know the five or six key elements that we have to actually — absolutely nail to perform against that, and we can hit those very, very quickly. Analytics I think has really paid off for us. But I do think the acquisition play is a good one, and I do think the market is in a more reasonable position.