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Analysis of IBM Global Services’ 2003 Business Results

“Crown Jewel” Restored?

IGS Returns to Growth Thanks to PwCC Acquisition, Weak Dollar

PHOENIX, March 22 – Eight years ago almost to the day, we urged the former IBM CEO to consider splitting up Big Blue (see "Break Up IBM!", Mar. 20, 1996).  We felt the IBM stock was grossly undervalued at the time (it was trading at about a quarter of today’s price - $25 vs. $90 to $100).  Breaking up the company, we thought, would force the “Wall Street stoneagers,” the crowd of analysts who followed IBM back then, to give credit where credit was due.


Back to Growth…

So IBM took action.  In at late July 2002, it bought PriceWaterhouseCoopers Consulting (PwCC) for $3.5 billion to bolster its growth, and to augment its ailing consulting business.  

The strategy worked.  At least mathematically…  One and a half years after the PwCC acquisition was completed, IGS is back to double-digit growth.  In 2003, its revenues were up 17%, from $36.4 billion to $42.6 billion.  It was the best growth rate since 1995 (see the chart).  And we expect IGS also to grow this year (by about 8%).


Business Segment Analysis

Still, “flat or slightly higher” 2003 performance beats the revenue declines from prior years.  Plus, IBM and IGS management deserve kudos for a smooth integration of the PwCC operation into the Big Blue fold.

PwCC is today an invisible part of the 60,000-people strong Business Consulting Services (BCS) unit, whose revenues surged by 38% in 2003, from $9.3 billion to $12.9 billion. 


Maintenance Boosts IGS’   Profits; IGS Net Drag on IBM

As we had noted in our previous Annex Bulletins on IGS, hardware maintenance has been a boon to IGS’ profits over the years.  IGS, on the other hand, has been a net drag on IBM’s earnings.  How’s that possible?

Well, consider the facts… 


“Rescoping” Challenge

The term “locked in,” however, must be used loosely and advisedly.  For, many of IBM biggest customers have proven that they can renegotiate their contracts (downward) in the last two to three years.  It’s a process that the IBM CFO, John Joyce, termed “rescoping” in his July 2002 teleconference with Wall Street analysts.

“Rescoping” may have been a new word in the English language, but a depletion of IBM’s backlog has been something that we have been warning about since the fourth quarter of 1999 (see the chart).



... So what will it take to restore IBM’s biggest “crown jewel” to its former luster?  Well, a lot more than marketing slogans (like the OnDemand campaign).  Stopping the hemorrhaging that the “rescoping” is causing, for example, is much more important.  So is finding new markets to grow the business, such as SMB (small and medium business market).

If IGS goes back to basics and focuses on substance that had made it great in the 1990s – delivering best value for the money – its “crown jewel” status may indeed be restored.  If not, the OnDemand fluff and all the hoopla that came with it will end up as yet another passing fad.

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (12 pages in print edition), along with all charts which back up our story.

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Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004: "Crown Jewel" Restored? (Mar 2004); "Cap Gemini: Another, Smaller Loss" (Feb 2004);  "CSC: Good Quarter Gets Boos" (Feb 2004); "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); "Cronyism Is Alive and Well at EDS" (Jan 2004);  "Five Most and Least Likely Forecasts for 2004" (Jan 2004)

2003 IGS:  "IBM OnDemand: Different Strokes for Different Folks" (Dec 2003); "Investing in Growth" (Apr 2003)

2003 IBM: "IBM vs. HP: Spinning Global Server Market Shares" (Nov 2003);  "Finally Heard, Part II," (Nov 2003), “Small Is Now Big at Big Blue” (Oct 16),  “On the Nose But No Cigar” (July 16), “A Paler Shade of Blue” (June 2), “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), "Finally Heard!" (Jan 29), “Start of a Real Turnaround?” (Jan 17).

2002 IGS: "Half or Double Trouble?" (Aug. 12, 2002), "IBM to Take $500M Charge" (Sep 3, 2002), IBM-PwCC Update (Oct 2, 2002), Analysis of IBM Second Quarter Results (July 17, 2002), IBM Layoffs Confirmed! (Aug 14, 2002), Analysis of IBM Third Quarter Results (Oct 16, 2002), Boom Amid Gloom and Doom (Oct 10, 2002)

2002 IBM: “Gerstner: The Untold Story”  (Dec 27), "Gerstner Spills the Beans" (Dec 13), "On a Wing and a Prayer" (Oct 21), "IBM-PwC Tie the Knot" (Oct 2), Big Blue Salami (June 19), "Looming IBM Layoffs" (May 14), "IBM 5-Yr Forecast: From Here to Eternity?" (Apr 2002),  “Tough Times, Soft Deals,” (Apr 25, 2002), “Gerstner’s Legacy: Good Manager, Poor Entrepreneur” (Jan 2002), IBM Pension Plan Vapors: Where Did $17 Billion Go? (Mar 2002), "Sir Lou OutLayed Lay!" (Apr 1, 2002).

A selection from prior years: Is IBM Cheating on Taxes, Annex Bulletin 99-17 (May 1999),  IBM 5-year Forecast 2001: An Unenviable Legacy (June 2001) "Break Up IBM!" (Mar. 1996), Fortune on IBM (June 15, 2000), “Smoke and Mirrors Galore,” July 2000), "Slam Dunk of Bunk" (Jan 2000), Annex Bulletin 98-14 ("Wag the Big Blue Dog"), Armonk's Fudge Factory (Apr. 9, 1999)Where Armonk Meets Wall Street, Greed Breeds Incest (November 1998)Stock Buybacks Questioned: Is IBM Mortgaging Its Future Again?, 97-18 (4/29/97),  "Some Insiders Cashed In On IBM Stock's Rise, Buybacks" 97-22, 7/27/97,  Djurdjevic’s Forbes column, "Is Big Blue Back?," 6/10/97;  “Executive Suite: How Sweet!,” (July 1997), "Gerstner: Best Years Are Behind", Aug. 10, 1999), "IBM's Best Years Are 3-4 Decades Behind Us" (July 1999), "Lou's Lair vs. Bill's Loft" (June 1999),  "Corporate Cabbage Patch Dolls," 98-39, 10/31/98; Djurdjevic’s Chronicles magazine October 1998 column, "Wall Street Boom; Main Street Doom", “Louis XIX of Armonk,” (Aug. 1996), "Mountain Shook, Mouse Was Born" (Mar. 25, 1994), “A Nice Guy Who Lost His Compass” (Jan 26, 1993), “Akers: The Last Emperor?” June 1991), Industry Stratification Trend (Mar. 30, 1990) etc.]

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Volume XX, Annex Bulletin 2004-08
March 22, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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