Vijaya Narapareddy University of Denver www.ibm.com In July 2007, International Business Machines (IBM) signed an $84.4 million deal with ‘Spanish utility Tberdrola, one of the world’s largest producers of renewable energy, to open an Tnnovation Center at Iberdrola in Salamanca, Spain to develop new information tech- nologies and provide services forthe utility. Also that month, IBM announced thet itis ere- ating a Global Center of Excellence for Nuclear Power in France to develop software and consulting services for the design, construction, and operation of riuclear power plants. IBM is capitalizing on the global warming triggered revival of interest in nuclear power as an alternative to coal-fired plants. France obtains 80 percent of electricity from nuclear power. “Nuclear power plant license extensions and new plant construction are driving the need for sophisticated risk modeling and information tools,” said Guido Bartels, general Manager for IBM Global Energy and Utilities Industry, in a statement. IBM’s organizational structure is provided in Exhibit 1. Note that CEO/President ‘Samuel Palmisano, Executive VP Nicholas Donofrio, fourteen Senior VPs and three other VPs are repositioning IBM from a computer company to an information technology ser- vices company through a series of aequisitions and divestitures as shown in Exhibit 2. In 2006, 13 acquisitions of approximately $4.8 billion were completed, enabling IBM to expand its software and services business. For the nine months ending September 30, 2007, IBM’s revente's increased 7 percent to $69.92 billion, Net income from continuing operations increased 9 percent to $6.46 billion, Revenues reflect an inerease in income from the company’s Global Technology Services seg- ‘ment and higher sales from both its Software segment and Global Business services segment, Net income also reflects higher gross margin and higher intellectual property income. In July 2007, IBM acquired Watchfire Corporation. A privately held security and ‘compliance testing software company based in Waltham, Massachusetts. In August 2007, IBM acquired WebDialogs, Inc., and then a month later completed the acquisition of DataMirror Corp. Company History Based in Armonk, New York, IBM was founded in 1888 as “Herman Hollerith and the ‘Tabulating Machine Company.” It was incorporated in 1911 as “Computing-Tebulating- Recording Co.” The company later changed its name to International Business Machines (IBM) Corporation in 1924 after becoming a Fortune 500 company. Also known as “Big Blue,” IBM has on several accolades. It is known to have more patents than any other ‘American technology company. In addition to being ranked among the “Worldwide Top 20 Semiconductor Sales Leaders,” to date, IBM boasts of its employees” achievements in the field of science and technology three Nobel Prizes, fous Turing Awards, five National Medals of Technology, and five National Medals of Science. IBMis well-known for its sales-centered business culture as it continues to hire its exec- utives and managers from its sales force. Its current CEO/President, Samuel Palmisano, started his career asa salesman with the company. The company’s traditional culture of wearing a dark sui, white shirt, and te changed in the 1990s under the leadership of then CEO Lou Gerstner. IBM began to chart a new course in 2003 using a very unique approach. It engaged 50,000 employees in an online intranet discussion over a period of three days using its Jam62 VUAYA NARAPAREDDY EXHIBIT 1 IBM's Organizational Structure |, Samuel J. Palmisano, Chairman of the Board, President and CEO 55 2. Nicholas M. Donoftio, Innovation and Technology, Executive VP 61 Senior Vice Presidents: 3. Michael E. Daniels, Global Technology Services 2 4, Douglas. Elix, Group Executive, Sales and Distribution 58 5.J. Bruce Harreld, Marketing and Strategy 56 6. Paul M. Hor, Research 60 7. Jon C. Iwata, Communications “4 8. Jobm Kelly, I, Technology and Intellectual Property 3 9. Mark Loughridge, Chief Financial Officer 33 10. 1. Randall MaeDonald, Human Resources 58 11, Steven A. Mills, Group Executive, Software Group 55 12, Robert W. Moffat, Jc, Integrated Operations 50 13, Virginia M. Rometty, Global Business Services 4 14, Linda S, Sanford, Enterprise On Demand Transformation 54 15, Robert C. Weber, Legal and Regulatory Affairs, and General Counsel 56 16. William M. Zeitle, Group Execative, Systems and Technology Group 9 Vice Presidents: 17. Jesse J. Greene, Je, Treasurer a 18. Daniel E. "Donnell, Secretary 29 19. Timothy S. Shaugbnessy, Controller ‘Source: hitp:fwnw¥.se: gow! Archivesledgat/datal51143/000104746907001434/0001047469-07-001434-indeBIT 2_Recent IBM Acquisitions and Divestitures INDUSTRY LANDSCAPE. ae = wowibm. com; 2006 Anaual Report, p. 16. ology. The content generated during those discussions was then analyzed using fier, a sophisticated text analysis software. Three themes emerged during this 2003 which form the basis for the company’s core values, “Dedication to every Client's »” “Tnnovation that matters for our company and the world,” and “Trust and per- responsibility in all relationships.” Subsequently, a 2004 Jam enabled 52,000 loyees over a period of three days to discuss and select best practices to support the Yalues adopted earlier. The InnovationJam, launched in June and September of 2006, gcd 150,000 employees residing in 104 countries, their families, pariners, customers, universities in two brainstorming sessions spanning 72 hours each, resulting in the pilation of over 46,000 ideas. In November 2006, IBM announced that it will commit ‘million to the ten best ideas generated during the InnovationJams. This is how IBM Strategic planning, transforming itself to a innovation-centric globally integrated cor- ion that focuses on new high-profit high-value-added businesses and services. IBM reports results of its operations in eight industry sectors as listed in Exhibit 3 that the $290 million growth in revenues generated by continuing operations in 2006 sainly fueled by approximately 18 percent growth in the Original Equipment i in turn, is driven by rising demand for 1BM Revenues by Industry Sector (In $ Millions) YR.TOYR, PERCENT YR.TOYR. CHANGE PERCENT CONSTANT THE YEAR ENDED DECEMBER 31 2006 2005* CHANGE CURRENCY istry Sector: nancial Services $ 25,181 S 24,186 41% 38% lic 13,401 14,054 ap 63) ustrial 11,535 11699 (4a) a6 Fibution 9,034 8,959 08 03 ommunications 8,979 3,601 09 06 Small & Medium Business 16981 17597 es Ga) Driginal Equip Manufacturers (OEM) 3,856 aan 19 179 2.756 2.951 00 $ 91424 § 91,134 3% (0.0% sified o conform with 2006 presentation. tpl se. gov Archivestedgar(a/t1431000104746907001434/0001047469-07.001434-indexhim, Exhibit 13, p. 22. CASE7 + INTERNATIONAL BUSINESS MACHINES — 2007——7"_.:.:LmLDLDLDLUmUmUmUmUmUmmt”””” 64 VUAYA NARAPAREDDY game processors in the microelectronics business. Note in Exhibit 3 that ‘sales/revenues declined in 2006 in three of the industry sectors: (2) public, (2) inc and (3) small/medium business. | Global Operations TBM operates in 170 countries, with about 60 peroent of its revenues being generated the United States. About 30 percent of IBM’s employees are in Asia Pacific, 45 percent: the United States, and 35 percent are in other countries IBM's R&D system employs 20,000 software developers in 61 labs located in 15 countries, and 3,000 scientists and nologists work at its Research Centers operating in China, India, Israel, Tapan, Swit ‘and the United States. Tn addition to industry segments, IBM provides results of its operations in geographic segments: (1) Americas, (2) Europe/Middle East/Africa, (3) Asia Pacific (4) OEM. IBM's subsidiaries worldwide are listed in Exhibit 4 with Revenues 2006 Employee Population by Geographic Region Europe, Middle East, and Aftiea Asia Pacific Ameritas Source: wowwiibm.cony2006_jom_annual pdf EXHIBIT 4 IBM's Global Subsidiaries Slate or county of incorporation ‘or organization ‘Company Name IBM Credit LLC ‘USA (Delaware) TBM International Foundation USA (Delaware) IBM International Services Corporation USA (Delaware) TBM Business Transformation Center, Sr] Costa Rica “Tivoli Systems, Ine USA Delaware) TBM World Trade Corporation USA (Delaware) TBM Bahamas Limited Bebamas WIC Insurance Corporation, Ltd Bermuda 18M Canada Limited IBM Canada Limitee Canada TBM Argentina Sociedad Anonima Argentina IBM Cantda Credit Services Company Canada : IBM Canada Holding Company, Limited Parinership Canada IBM Americas Holding Limited Bermuda TBM Brasil—Industuia, Maquina e Servicos Limitada Brazil IBM de Bolivia, SA Bolivia TBM de Chile, SAC Chile IBM del Ecuador, C.A. Bcuador: ‘CASE7 * INTERNATIONAL BUSINESS MACHINES —2007 65, 1BIT 4 IBM's Global Subsidiaries—continued pany Name IBM Mexico, S.A. de CY TBM de Mexico, S.A. IM del Uruguay, S.A de Venezuela, S.A. IM AINZ Holdings Pry. Limited TBM Australia Limited IBM New Zealand Limited India Private Lid TBM Indonesia World Trade Asia Holdings LLC ‘YK IBM AP Holdings IBM Japan, Ltd Korea, Inc Malaysia Sdn. Bhd Philippines, Incorporated ‘Thailand Company Limited Vietnam Company Bulgaria Lid Croatia Lid /IBM Hrvatska d.o.0 Egypt Business Support Services Festi Osauhing (IBM Estonia Ou) alia SpA ‘Companhia IBM Portuguesa, S.A. IBM Hellas Information Handling Systems S.A IBM Israel Limited IBM (Ihtemational Business Machines) Turk Limited Sirkett IBM South Africa Group Lid TBM South Africa (Pry) Ltd Bast Aftica Limited jedriba ar irobezotu atbildibu IBM Latvija mM Lietuva Holdings B.V IBM Global Holdings B.Y IBM Central Holding GmbH IBM Deutschland GmbH IBM Cesterreich Internationale Bueromaschinen Gesellschaft m.b.H “IBM (Schweiz)-IBM (Suisse)-IBM (Svizzera)-IBM (Switzerland) IBM Central and Eastern Burope B.V IBM Ceska Republika spol. sro ‘State or country of incorporation ‘or organization Mexico Mexico Uruguay Venezela Australia Australia New Zealand India Indonesia USA Delaware) Japan Jepan Korea (South) Malaysia Philippines 5 Thailand Vietnam Bulgaria Croatia Egypt Estonia Italy Portugal Greece Israel ‘Turkey South Aftica South Africa Kenya Latvia Lithuania Netherlands ‘Netherlands Germany Germany Austria Switzedland Netherlands Czech Republic ‘ continued66 VUAYA NARAPAREDDY EXHIBIT 4 IBM's Global Subsidiaries—continued ‘Company Name TBM East BuropelAsia Ltd IBM—Intemational Business Machines ¢.0.0., Belgrade IBM Polska Spz.0.0 IBM Romania Sxl IBM Slovensko spot s.r IBM Ukraine JBM International Hoidings B.V IBM China Holdings B.V. IBM China Company Limited TBM China/Hong Kong Limited IBM Ireland Limited IBM Singapore Pte, Lid Jntemnational Business Machines Corporation Magyarorszagi Kft Lefern Limited IBM International Treasury Services Company IBM North Region Holdings IBM Nederland N.V IBM United Kingdom Holdings Limited IBM United Kingdom Limited IBM International BV IBM de Colombia, S.A IBM de! Peru, S.A IBM Europe Holdings B.V Compagnie IBM France, S.A.S IBM Maroc 1BM Tunis TBM Taiwan Holdings BV IBM Taiwan Corporation ‘Intemational Business Machines of Belgium S.A International Business Machines West Africa Limited IBM Slovenijad.o.o International Business Machines, S.A. IBM Nordic Akticboleg IBM Danmark A/S ‘International Business Machines A/S Oy International Business Machines AB International Business Machines Svenska A.B IBM Middle East FZ-LLC (A) Minor percentage held by other IBM shareholders subject o epurchase option. (B) Remaining percentage owed by other wholly-owned IBM company(s). ‘Source: www.see,gov: EX-21 422175501 zex-21-htm State or country of Incorporation or organization Russia Serbia and Montenegro Poland Romania Slovak Republic Ukraine Netherlands Netherlands PRK Hong Kong Ireland Singapore Hungary Ireland Ieland United Kingdom Netherlands United Kingdom United Kingdom Netherlands Colombia Pema Netherlands France Morocco Tunisia Netherlands ‘Taiwan Belgium Nigeria Slovenia, Spain sweden Denmark Norway Finland ‘Sweden United Arab Emirates‘CASE7 * INTERNATIONAL BUSINESS MACHINES — 2007 67. IBM Revenues by Geographic Area (In $ Millions) g ricas 43.2 39511 426 38.817 1.8% rope/Middle East/Africa 334 30,491 334 30,428 02 ia Pacific 192 17,566 204 18,618 6D 36 2m. 179. aout htplfwwsec.gov/Archives/edgar/éata/S!143/000104745907001434/0001047469-07-001434-index htm, Exhibit 13, agraphic segment shown in Exhibit 5. Note that the Americas represent over 40 percent company’s revenues. This segment grew 1.6 percent from 2005 to 2006 while rev- in the other regions declined. In contrast, the OEM segment, which is the smallest at than 5 percent of toxal revenues, experienced the largest growth of approximately 18 nt Revenue growth from 2005 to 2006 is the highest in India (38 percent), followed by ia (21 percent), Brazil (19 percent), and China (16 percent). Excluding the PC busi- these four markets alone grew 21 percent in 2006. By 2010, the IT markets in these countries are expected to grow twice as fast as in the rest of the world. This growth is cted to be equal to over $150 billion in IT services. isiness Segments ral years ago, IBM divested its personal computers and hard disk drives businesses as ‘were becoming mature and commodity-like businesses. IBM hes since then concentrated becoming stronger in high-value-added businesses like service-oriented architecture ), information on demand, business process services, and open modular systems for nesses of all sizes, IBM concentrates on the development and manufacture of the iced information technologies, including computer systems, software, storage systems, microelectronics, The company reports results in both geographic terms and by product. As presented in Exhibit 6, IBM is structurally organized in three segments or div- : (1) systems and financing, (2) software, and () services. The systems and finane- segment offers servers; data storage products, including disk, tape, optical, and ie area networks; microprocessors and integrated circuits; system and component ign services, and technology and manufacturing consulting services; printing systems, lading production and on-demand print solutions, enterprise print technolégies, and ed software; and point-of-sale retail systems. This segment also offers short-term entory and accounts receivable financing; lease and Joan financing; and sells and s used equipinent. IBM's software segment provides information management software for database, ent management, and information integration; lotus software for collaboration, mes- ng, and social networking; rational software, a process automation tool; Tivoli soft- re for infrastructure management, including security and storage management, sphere software for Web-enabled applications, product life-cycle management sofi- ; and operating system software. IBM's services segment offers business process outsourcing, consulting and systems -gration, strategic outsourcing services, integrated technology services, IT infrastructure iintenance services, application management services for packaged software and custom id legacy applications, and applications on demand services. IBM serves banking, insur <68 VIJAYA NARAPAREDDY EXHIBIT 6 IBM's Three Core Business Segments Engineering & technology services Priming Retallstore mn, slations Micrdeconcs ay Servers CConsoing se Symes iteration Operating = ee Business * 2 anton outosrcing ea . management : it ° ° ots ° ° : sieteic Rational 5 os hel negated technology Product Webenhere Applicaton coe see ondenand _appltion ramaqenent sraragement Source: wsiv.bm.com; 2006 Annual Report, p. 17. EXHIBIT 7 IBM's Revenue by Product (In $ Millions) For the Year Ended December 31 2006 Annual Change___-2005_——_Annual ___ Statement of Earnings Revenue Presentation: $ * s Global Technology Services 48247 18 41407 Hordwace 22,499 a6) 24343 Software 18,204 82 16830 Global Financing 2379 ay 2,407 Other 4 364) 17 Gas Total 91,404 03 91,134 Source: tpl -see gov" tohivesledgardata1 1431000 1G4746907001434/0001047469-07-001434 index.htm. Exhibit ance, education, government, healthcare, life sciences, aerospace and defense, chemical and petroleum, electronics, distribution, and communication markets. ‘The company’s revenues by segment are displayed in Exhibit 7 and ‘global services account for more than half of the company’s revenues, follo hardware and software segments, respectively. Note that in 2006, while IBM had) revenue growth, the software business was the only segment experiencing siBIT 8 Revenues, Gross Profit, and Pretax Income by Product (as a Percentage of Total Revenues) ues for the Year Ended December 31 | Technology Services Business Services Inupulwnw sec gow/Archivesledgat/datalS!143/0001(4746907001434/0001047469-07-001434-index him, bit 13,p.23. Profit the Year Ended December 31 2006 2005__¥rto¥r. Change dated Gross Profit Margins: Global Services 215% 26.0% 15 pss. Hardware 370 35.1 19 Software 349) 03 Global Financing 547 (44) Other 1 hupeliwar see gour Archivesfedgar/data/s1142/000104746907001434/0001047469-07-0D1434-index.him., bit 13, p. 25, Pretax Income by Business Segment 2006 Segment Pretax Income Mix Software Source: wor bm.com 2006 Annual Report, p-6 cowth (8.2 percent), followed by global services (I.8 percent). The remaining three busi hess segments experienced declines in revenues. Data presented in Exhibit 8 reveal similar trends. Revenues from the global technol- cay sevices, global business services, and global financing as a percentage of total revenues all declined in 2006 while the hardware and software segments showed modest gains. “About 40 percent of IBM's pretax income in 2006 is contributed by software, 37 percent by services, and the remaining 23 percent by systems and financing, CASE7 + INTERNATIONAL BUSINESS MACHINES — 200770 \VUAYA NARAPAREDDY EXHIBIT 9 Direct Competitor Comparison Market Cap $156288 «14.11B_ 116858 281.938 Employees 366486 131000 156000 71,000 Quily Rev Growth 650% 290% «13.20% © 32.10% Revenue 92798 21.41 (97.068, 49.568 Gross Margin 133% «135% AAG —80.65% EBITDA 19208 «2288-10-78 2091B Operating Margin 1440%. «475% «= 785% = 39108 Not income 9558 63100M = «6:39B 13.868 EPS 6.262 1156 2.295 1.382 PIE Ratio 1681 B09 19.44 2132 PEG (5 yrexpected): 143 0.83 115 1.82 170 0.66 120 5.16 FEDS = Blecironic Data Systems HP Hewlett-Packard MS =Microsof Industry = Diversified Computer Systems ‘Source: Adapted from hup:finance yahoo.com Competition IBM is a key player in the bypercompetitive Diversified Computer Systems i proliferated by global giants ranked in the Fortune 50 companies as well as fast-growing specialized organizations around the world. Itranks second in market ization, net income, and long-term growth behind Microsoft in the Diversified Ci ‘Systems industry, but leads the industry in sales ($92.79 billion) and number of es (36686). Key competitor data is given in Exhibit 9. Note that IBM’s key comy the industry are Microsoft, Hewlett Packard, and Electronic Data Systems Microsoft (MSFT) Founded by Bill Gates and Panl Allen in 1975 in Albuquerque, New Mexico, MSF midable competitor in the industry. Headquartered in Redmond, Washington. leading provider of operating systems and software, Its Microsoft Windows op tem and Microsoft Office software dominate the marketplace. “With a market cap of nearly $282 billion, MSF is a market leader in gross (80.7 percent) operating margins (39.1 percent), and quarterly revenue growth of ‘cent. With 71,000 employees (less than 20 percent of IBM’s employees) worldws countries), MSF is a nimble and aggressive organization. The company is through its holdings of the MSNBC cable television network, the MSN Internet the Microsoft Encarta, In addition, it sells computer hardware products (¢-8- Mouse), and popular home entertainment products, such as the X-box, Zune, and) Tn January 2007, the Harris Interactive/The Wall Street Journal Reputation survey concluded that MSFT has the world’s best corporate reputation based om: financial performance, visionary leadership, workplace environment ranki charitable deeds of the Bill and Melinda Gates Foundation throughout the views its major competitor, however, to be Google rather than IBM. Hewlett-Packard (HPQ) HPQ, also known as HP, is the Jargest company in the industry in sales ($97. ‘Headquartered in Palo Alto, California, HP is well known worldwide for its) sonal computers, and related ‘services. Founded in 1939 by William Hewlett; Packard, HP currently ranks number one in personal computer sales, ahead on ts estimates for 2007, HP has the strong potential to be the frst 17.billion mark. After its merger with Compaq in 2002, HP has grown to offer a full ‘of services to architect, implement, and support IT infrastructure in addition to its hardware and software businesses. With 157,000 employees and a market cap of ‘billion, HP is a strong competitor to IBM. ‘onic Data Systems (EDS) red in Plano, Texas and established in 1962 by Ross Perot, EDS has 131,000 . Approximately 80 percent of EDS stock is held by institutional investors and fund owners, It offers a host of information technology and business process outsourc- ces worldwide, About 60 percent of its revenues come from the Americas, 30 percent [Europe, Middle East, and Africa, and 5 percent from Asia Pacific. In 2006, it divested its lary, A.T. Keamey, a management consulting company, and acquired two leading com- from Bangalore, India. These acquisitions allow the company to offer onshore and testing and quality assurance services. EDS's clients include large companies in the turing, financial services, healthcare, communications, energy, transportation, and er and retail industries, and governments around the world. With a market cap of Dillion and revenues of $21.4 billion, i tails behind the big three in the industry. ince it 10 reveals IBM’s income statement and shows a dramatic decline of over $5.1 billion ues between 2004 and 2005, followed by a growth of $290 million from 2005 to 2006. IBM's Income Statement (In Thousands} Dec. 31,2006 Dec. 31, 2005 Dec. 31, 2004 $91,424,000 91,134,000 96,293,000 53,129,000 54,602,000 60,261,000. 38,295,000 36,532,000 36,032,000 rating Expenses 6,107,000 5,842,000 5,673,000 20,259,000 21,314,000 19,384,000 (900,000) - 4,169,000) Total Operating Expenses - - - ting Income or Loss 12,829,000 9,376,000 12,144,000 ‘income from Continuing Operations “Total Other Income/Expenses Net 766000 3,070,000 23,000 Earnings Before Interest and Taxes 13,595,000 12,446,000 12,167,000 Interest Expense 278,000 220,000 139,000 Income Before Tax 13;317,000 12,226,000 12,028,000 Income Tax Expense 3,901,000 4,232,000 3,580,000 Minority Interest - = - Net Income From Continuing Ops 9,416,000 7,994,000 8,448,000 Non-Recurring Events Discontinued Operations 76,000 (24,000) (18,000) Extraordinary Items - - - Effect of Accounting Changes - (6,000) - Other Items - - - Net Income 9,492,000 7,934,000 8,430,000 Preferred Stock and Other Adjustments = = = [Net Income Applicable to Common Shares $9,492,000 __ $7,934,000 __$8,430,000 ae ncn SS ‘Source: Adapted from htp:inance yahoo.com (CASE » INTERNATIONAL SUSINESS MACHINES — 200772 VWAYA NARAPAREDDY EXHIBIT 11 IBM’s Balance Sheet (In Thousands) Balance Sheet PERIOD ENDING Dec. 31, 2006 Dec. 31, 2005 Dec. 31, 2¢ ASSETS. Current Assets ‘Cash and Cash Equivalents $8,022,000 12,568,000 10,053,000 Short-Team Investments 2,634,000 1,118,000 517,000, Net Receivables 28,655,000 26,193,000 30,365,000 Inventory 2,810,000 2,841,000, 3,316,000 Other Current Assets 2,539,000 2,941,000 2,719,000 Total Current Assets 44,660,000 45,661,000 46,970,000 ‘Long-Term Investments, 13,449,000 14,602,000 16,418,000 Property, Plant end Equipment 14,439,000 13,756,000 15,175,000 Goodwill 12,854,000 9,441,000 8,437,000) Intangible Assets 2,202,000 1,663,000 1,789,000 ‘Accumulated Amortization - - - Other Assets 10,629,000 20,625,000 20,394,000 Deferred Long-Term Asset Charges 3 = z “Total Assets 103,233,000 105,748,000 108,183,000) LIABILITIES (Current Liabilities ‘Accounts Payable 18,006,000 17,292,000 Short/Current Long-Term Debt 8,902,000, 7.216.000 Other Current 13,182,000 10,644,000 ‘Total Current Liabilities 440,090,000 35,152,000 Long-Term Debt 13,780,000 15,425,000 Other Liabilities 17,890,000 22,073,000 Deferred Long-Term Liability Charges 3,167,000 - Minority Intorest - Negative Goodwill - - ‘Total Liabilities 74,727,000 - 72,650,000 Stockholders? Equity Misc Stocks Options Warrants = - = Redeemable Preferred Stock - - - Preferred Stock = a ‘Common Stock 31,271,000 28,926,000 Retained Eamings 52,432,000 44,734,000 ‘Treasury Stock (46,296,000) 8,546,000) Capital Surplus - = Other Stockholders’ Equity (8,901,000) _-@.016,000) ‘Total Stockholders’ Equity 28,506,000 33,098,000 Total Liabilities and SE $$103,223,000 105,748,000 _ 109,183. Source: Adapted from htpd/Ifizance yahoo.comCASE + INTERNATIONAL BUSINESS MACHINES — 2007 73 this recent growth pales in comparison to prior years, IBM's net income has $1.6 billion or 20 percent from 2005. A major portion of the gains come from a (6 percent) decrease in SGA (selling general and administrative) expenses daring This decrease can mainly be attributed to the restructuring charges in 2005. it 11 presents the IBM balance sheets from 2004 through 2006 and shows some trends. The company’s current ratio dectines from 1.18 in 2004 to 1.11 in 2006. 3M’s goodwill on its balance sheet is up 36 percent in 2006 to a staggering $12.8 4000 is is not good. The company’s long-term debt dectines 10.6 percent to $13.7 billion. 000 pone 1¢ a long way in its efforts to transform itself into an innovation-driven integrated pn y as it seeks to pursue value-added businesses and sérvices that will generate 2,000 for its customers and high profits for its shareholders. Whether itis on the right path 8,000 trends in the company's pretax income and gross margins. This exhibit depicts a ‘rend in both the gross margins and pretax net income in 2002 through 2006. EXHIBIT 12. Trends in IBM's Pretax Income and Gross Margins, 2002-2006 Margins 50% 419 alice hi odes <2 08 Lanes un PRETAX INCOME MARGIN Source: wsrw.ibm.com; 2006 Annual Report, p.T EXHIBIT 13 Trends in IBM's Earnings per Share Earnings Per Share (From containing operations) Source: worwibm.com:; 2006 Annual Report, PT4 \VUAYA NARAPAREDDY EXHIBIT 14. IBM's Selling, General and Administrative Expenses (In Millions) For the Year Ended December 31 Yr. to Yr Change Selling, general and administrative expense: Selling, general and administrative —base $17,459 ‘Advertising and promotional expense 1195 1286 69) 289 289 04 “Workforce reductions —ongoing Restructuring o 1482 NM "Amortization expense —acquired intangibles 208 218 as) Retirement-rlated expense 387 846 G08) 606 G07) ‘Stock-based compensation ‘Bad debt expense GD Total $21314 ‘*Reclassfied to conform with 2006 presentation, NM—Nor meaningfil ‘Source: tuples. gos/Archives/edgarldata/S!143/000104746907001434/0001047469-07-001434 index.htm, p. 2 Exhibit 13 shows trends in IBM’s eamings per share. In 2002, earnings from cont uuing operations were $2.43 per share, rising steadily to $6.06 in 2006. This constitutes 149 percent gain over a period of four years, averaging an annual gain of 0.37 percen approximately 91 cents, This is impressive as compared to other domestic competita its strategic group presented in Exhibit 8. In 2006, the top performer in this metric is ‘while the nexi-best performer is HP at $2.30 EPS. Details of the SGA expenses shown in Exhibit 14 demonstrate that IBM's a4 {ng and promotion expenses decrease 7 percent, from about $1.3 billion in 2005 to: billion in 2006, Its research and development expenses shown in its income states (Exihibit 9), when expressed as a percentage of sales, rise meekly from 5.9 percent in to 6.4 percent in 2005, and 6.7 percent in 2006. Js IBM compromising its efforts to be the customer- and innovation-driven com it seeks to be in this globally competitive environment? Evaluate its new strategic pl present your recommendations. References ‘wwweds.com wworcinance:yahoo.com swwwhp.com swww.ibm.com www.microsoft.com wwwsee-gov www.en.wikipediaorg +2009 financial statements for this case are available at www:pearsonglobaleditions.co