IBM Acquires Netezza - Analyst Blog

International Business Machines Corp. (IBM) announced the completion of the acquisition of renowned data warehouse company, Netezza Corp. as previously announced by IBM on September 20^th.

Marlborough, Massachusetts-based Netezza is a leading company in data warehousing technology. The company develops computer appliances that integrate hardware and software for analyzing a huge amount of data in a quick and efficient manner.

IBM acquired Netezza in an all cash transaction of $1.70 billion or $27.00 per share. The price of $27.00 per share reflects a 9.8% premium on September 17 closing price of Netezza of $24.60. IBM's offer values Netezza at 8.9 times of sales ($190.6 million) in its fiscal year that ended in January, 2010.

Business analytics/intelligence has gained significant growth in recent times. With a rapid increase in data volumes, organizations are trying hard to process information on the run at a very short span of time, rather than fetching it from the database. This process calls for a high interaction between software and hardware.

Since 2005, IBM has invested over $14.0 billion in 24 strategic acquisitions (including Cognos in 2007 and SPSS in 2009) to build its business analytics portfolio. Currently, IBM holds 14.5% share of the market, following SAS Institute Inc.'s 33.0% share.

Netezza recorded a robust revenue growth, up 45.0% year over year in second quarter 2011. For the current fiscal year 2011, Netezza expects sales of $250.0 million, implying that IBM's bid is 6.8 times of projected sales. Netezza has a strong clientele, including noted names like Virgin Media Inc. (VMED), Time Warner Inc. (TWX), Neiman Marcus and NYSE Euronext Inc. (NYX).

We believe this acquisition will provide a fillip to IBM's business analytics capabilities, driving revenue growth over the long term. Moreover, the acquisition is expected to boost IBM's competitive capabilities in the data warehousing market where it faces considerable competition from Oracle Corp. (ORCL).

Netezza will be integrated into IBM's Information Management software portfolio.We are of the opinion that the acquisition will help IBM gain share in the cloud computing market as managing large amount data has become an integral part of businesses.

Overview

Historically, IBM's earnings have consistently surpassed the Zacks Consensus Estimate, and IBM has raised its guidance for almost every quarter over the last three years. For fiscal year 2010, the company again raised its earnings forecast to at least $11.40 per share from the previously projected $11.25 per share. Earnings expectation is well ahead of the Zacks Consensus Estimate of $11.28.

IBM continues to proceed with its strategy of accretive acquisitions and plans to spend approximately $20.0 billion in acquisitions over the next 5 years.

IBM also expects to double its profit by 2015 to at least $20 per share. IBM expects growth to pick up, attributable to the new product cycles in the hardware division. Moreover, the new mainframe computers and high-end servers will lead to further growth in hardware sales in 2010.

Estimates on the rise

Estimates are trending upward as analyst opinion has turned increasingly bullish over the last thirty days.Out of the 18 analysts providing estimates, 16 have raised their estimatesfor the upcoming quarter(fourth quarter 2010) over the last 30 days.

Overall, estimates for the upcoming quarter have gone up from $4.00 per share, 30 days ago, to $4.08 per share (current).

We remain positive on IBM's growth potential; however, currency headwinds, European weakness, increasing competition, late hardware recovery, lower service contract signings and weak IT spending remain areas of concern.

IBM has a Zacks Rank of #3, which implies a Hold rating on a short-term basis (1-3 months). Over the long term (6-12 months), the stock has a Neutral recommendation.

 
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