Monday, May 24, 2010

IBM acquires Sterling Commerce from AT&T, should add 6cents to EPS (T)

IBM announced earlier today that it will acquire business collaboration firm Sterling Commerce from AT&T.  Among other things, Sterling helps companies manage the ever-more-complex supply chains involved with global operations.

From the release:
ARMONK, N.Y. and DALLASMay 24 /PRNewswire-FirstCall/ -- IBM (NYSE: IBM) and AT&T* today announced they have entered into a definitive agreement for IBM to acquire Sterling Commerce from AT&T for approximately $1.4 billion in cash. The acquisition of the Dublin, OH-based company will expand IBM's ability to help organizations create more intelligent and dynamic business networks by simplifying and automating the way they connect and communicate with customers, partners and suppliers both on-premise or through cloud computing delivery models.
Organizations are looking for ways to work more efficiently and profitably within their communities of business partners, customers and suppliers. IBM's products and services complement the world-class business-to-business capabilities of Sterling Commerce and together enable the integration of key business processes through the entire cross-channel solution lifecycle -- from marketing and selling to order management and fulfillment.  These offerings also give clients the flexibility to manage their networks of business partners through public or private cloud computing environments.
The purchase price was $1.4billion, but Sterling's revenue data was not shared.  Let's say IBM generously paid 3x sales for this business, and the pretax operating margin will be 25%.  That's an after tax boost to IBM's earnings of 6cents per share.  Not a heck of a lot when considering IBM will do $11.30 in earnings per share in 2010, but it's a better use of cash than letting it sit around earning nothing in a money market account.  Interestingly, this might be a business with a high degree of recurring revenue, which would have made it very attractive to private equity firms.  As I continue to expect, those LBO firms will face more and more competition from cash-rich public companies eager to deploy said cash at lower and lower "hurdle rates."

 Copyright 2010 AlphaNinja

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