(IBM) IBM Further Spreads Wings in Cloud

IBM Corp (IBM) recently announced that it has agreed to acquire Green Hat, a cloud-based software testing provider. This would mark IBM’s first acquisition in 2012. The to-be-acquired company will be integrated into IBM’s Rational Software business, which enables software development teams to deliver efficiently and facilitate time management in a cost effective manner.

Privately held Green Hat has headquarters in London, England and Wilmington, Delaware. The company boasts a strong global presence with 2000 customers who deploy Green Hat’s cloud-based software testing applications. The company’s clients include bellwethers from the telecommunications, financial services, transportation, healthcare and energy industries.

Green Hat’s applications are primarily implemented for software testing in a cloud-based environment, thereby reducing the cost of setting up a testing lab with software and hardware capabilities. Recent industry reports suggest that out of the total software development cost, more than 50% is being spent on software testing.

Moreover, Green Hat’s application accelerates the testing process, which is a necessity for the software developers to compete in the tablet and smartphone market in innovating new and industry-ready software applications.

IBM, along with Green Hat, will manage software testing of innumerable clients globally and will continue to innovate and revolutionize the client servicing space. IBM’s opportunity pipeline with respect to new technologies, especially those related to cloud computing continues to grow, as IBM regularly upgrades itself with the growing needs of the industry through acquisitions and partnerships.

Cloud computing has a number of advantages and the cost advantage of sharing resources has resulted in its growing adoption by businesses across various industries. However, proper management and usage of the technology is a prerequisite.

The cloud computing market is expected to grow at a CAGR of 40.0% from 2010 to 2015, crossing $7.0 billion in revenues by 2015. Cloud computing leads to improved services and elevated security requirements for companies that use it and IBM’s product portfolio is well positioned to benefit.

IBM remains a heavyweight in the cloud computing market and its strong cash balance enables IBM to acquire companies with high intellectual property (IP), which will drive further growth in upcoming quarters. With $20 billion to spend till 2015 on acquisitions, we expect IBM to continue with its strategy of acquiring companies, which it deems necessary to achieve its 2015 goals.

We have a long-term Neutral recommendation on IBM and are optimistic about its strong fundamentals and robust growth prospects going forward.

We also believe that IBM’s initiatives in the smarter planet, business analytics and optimization segments will drive long-term growth. Besides, the ability to generate strong free cash flow, expand margins and improve the already robust balance sheet make the stock attractive over the long term.

However, the competitive landscape includes technology giants, such as Oracle Corp. (ORCL), Hewlett-Packard Co. (HPQ), Microsoft Corp (MSFT) and EMC Corp (EMC), all of which have joined IBM in the cloud computing market.

We currently have a Zacks #3 Rank for IBM, which translates into a short-term Hold rating.

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