school project, study

1. 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

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

3. MBC 607_M001_Group 8 IBM Boer Chen, Yutao Tan, Shuai Wang
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
Debt to Capital Ratio 0.29 0.27 0.29 0.32 0.29
Industry Current Ratio 1.93 1.93 1.83 1.97 1.65
Debt to Capital Ratio 0.21 0.22 0.2 0.18 0.21
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

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

5. MBC 607_M001_Group 8 IBM Boer Chen, Yutao Tan, Shuai Wang
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-)

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

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