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February 13, 2014

IBM Borrows in Bond Market, Company Changes Focus

IBM (News - Alert) has raised another $4.5 billion by selling bonds this month, according to news reports. That comes on top of $39.7 billion in debt as of the end of last year at the company.

What makes it more difficult for IBM is that borrowing costs are increasing. The company sold 10-year bonds this month providing a 3.625 percent coupon.

Also, IBM saw its revenue decrease 5.5 percent in the last three months of 2013 to $27.7 billion. IBM is the only business included in the Dow Jones Industrial Average which lost money for investors in 2013.

“It’s an early signal that bondholders want a slightly larger premium to hold IBM because of the disappointing results, the challenges it’s facing in the hardware business and favoring shareholder returns over improving balance-sheet fundamentals,” Nikhill Patel, an analyst at Frost Investment Advisors, told Bloomberg Businessweek.

“The market’s certainly been disappointed with IBM’s performance over the past several quarters,” Michael Hodel, an analyst at Morningstar, also told Businessweek.

Under the new CEO, Ginni Rometty, IBM appears to concentrate more on software and services. For example, is likely to invest $1.2 billion in its SoftLayer (News - Alert) Technologies network-infrastructure business. IBM acquired the SoftLayer cloud computing firm last year. IBM will also spend $1 billion to build a new business unit around its Watson supercomputer – which is used in big data analytics.

Recently, IBM has moved away from servers – and is producing fewer chips for other companies. At the same time, IBM sold some business units which see lower margins. It raised $505 million by selling a customer-service business in January. Lenovo (News - Alert) will be acquiring IBM’s low-end server business for $2.3 billion. The company may sell its software-defined networking (SDN) business to anyone – and there were recent reports that Big Blue may sell its semiconductor manufacturing business, too, according to TechZone360.

Edited by Cassandra Tucker

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