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Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview                                      Overview
    Thesis
                 • IBM is an advanced information technology company
Business Model
                     • IT infrastructure and business process services
   Industry
                     • Consulting, systems integration, content management
   Sun Deal          • Strategic outsourcing and operating systems software
   Internal
                 • Long corporate history  thrived through many downturns
 Future Dev.
                 • Best-in-class levels of creating value for clients
Economic Moat
                     • Solve business problems and develop new ideas
  Valuation
                 • Large R&D investments and a focused commitment to innovation
 Risk Factors

 Conclusion
                               Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview                           Investment Thesis
    Thesis
                 • IBM is a “Globally Integrated Enterprise”
Business Model

   Industry
                 • Vision for the future  constantly looking forward

   Sun Deal      • Investing for growth in emerging markets (i.e. BRIC‟s)

   Internal      • A continuing shift to higher value businesses
 Future Dev.         • Strategic change from commoditized hardware segment to
                     software and green solutions
Economic Moat

  Valuation      • Ongoing productivity resulting in higher profit margins

 Risk Factors    • Will emerge stronger from this economic downturn
 Conclusion
                               Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                                        Business Model
    Thesis
                 1) Helping clients succeed in delivering business value
Business Model

   Industry
                 2) Providing long-term value to shareholders

   Sun Deal

   Internal

  Future Dev.

Economic Moat

  Valuation

 Risk Factors

 Conclusion
                              Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                                         Business Model
    Thesis
                 • Flexible business model allows IBM to continuously adapt to
Business Model   the changing economic environment
   Industry
                 • Global capabilities and broad mix of businesses
   Sun Deal
                     • 65% of revenues originate from outside the U.S.
   Internal
                 • IBM has divested commoditizing businesses such as PC‟s
  Future Dev.
                     • Increased market share in higher value segments through
Economic Moat        strategic investments and acquisitions

  Valuation      • Participation in the world‟s fastest growing markets
 Risk Factors

 Conclusion
                               Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                                       Industry Analysis
    Thesis
                 • IBM is at the forefront of innovation in the technology industry
Business Model

   Industry
                 • Main competitors are HP, Cisco, and Dell
                     • Universal shift away from less profitable hardware
   Sun Deal
                     segments to high-margin software services
   Internal
                 • Future growth will occur around the world in nearly every
 Future Dev.     industry (i.e. healthcare, infrastructure, energy, food, telecom,
                 money, etc.)
Economic Moat

  Valuation      • IBM was the first to see a change and begin building for a new
                 world
 Risk Factors

 Conclusion
                               Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                                Sun Microsystems Deal
    Thesis
                 • $8B proposed merger  $6.6B in cash paid by IBM
Business Model

   Industry
                 • Seen as a defensive move to open-source and use Sun‟s
                 software on their existing servers
  Sun Deal
                 • Increase in combined market share in data server industry
   Internal
                     • Strengthened competition against HP and Cisco
 Future Dev.
                 • Synergies from cost-cutting, similar workstation OS (Solaris
Economic Moat
                 and Unix)
  Valuation
                 • Largest acquisition ever made by IBM Corp.
 Risk Factors

 Conclusion
                               Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                                      Internal Analysis
    Thesis
                 • CEO/Chairman Samuel J. Palmisano  25+ years w/ IBM
Business Model

   Industry
                 • Excellent retention and sincere commitment to diversity
                     • Over 400,000 employees in 170 countries worldwide
   Sun Deal

   Internal      • Management is in constant pursuit to increase margins
                     • Aggressive share buybacks have improved EPS
 Future Dev.

Economic Moat    • 100 strategic acquisitions completed since 2000

  Valuation      • Ongoing transformation  4,000 new patents in „08
 Risk Factors

 Conclusion
                              Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                 Primary Uses of Cash Since 2000
    Thesis

Business Model

   Industry

   Sun Deal

   Internal

 Future Dev.

Economic Moat

  Valuation

 Risk Factors

 Conclusion
                    Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                 Segment Pre-Tax Income
    Thesis

Business Model

   Industry

   Sun Deal

   Internal

 Future Dev.

Economic Moat

  Valuation

 Risk Factors

 Conclusion
                 Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                   Financial Performance
    Thesis

Business Model

   Industry

   Sun Deal

   Internal

 Future Dev.

Economic Moat

  Valuation

 Risk Factors

 Conclusion
                 Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview

    Thesis

Business Model

   Industry

   Sun Deal

   Internal

 Future Dev.

Economic Moat

  Valuation

 Risk Factors

 Conclusion
                 Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                                   Future Development
    Thesis
                 • Less dependence on commoditized and cyclical businesses
Business Model

   Industry
                 • Looking to capture new infrastructure spending in emerging
                 markets
   Sun Deal
                 • “Smarter Planet” agenda will continue to deliver value to
   Internal      clients and shareholders
 Future Dev.         • Capitalize on the green economy
Economic Moat
                 • World-leading company in terms of efficiency and effectiveness
  Valuation
                 • Continue to grow the business organically
 Risk Factors

 Conclusion
                               Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                                         Economic Moat
    Thesis
                 • Brand loyalty from enterprise customers
Business Model

   Industry
                 • Extensive control of distribution channel  economies-of-scale
                     • Broad product line requires decades to build
   Sun Deal

   Internal      • Unrivalled customer applications and unparalleled ability to
                 find new solutions
 Future Dev.
                 • World-leading innovation and global R&D initiatives
Economic Moat
                     • $40B invested since 2000
  Valuation
                 • Diverse client range stretching across numerous industries
 Risk Factors

 Conclusion
                               Western Investment Club – Created by TMT, March 25, 2009
 IBM
                 Free Cash Flows Buildup                           1             2              3               4              5
  Overview                                                                    Projected Annual Forecast                                 Terminal Value
                                                                2009          2010          2011            2012             2013
                                                         12/31/2009    12/31/2010 12/31/2011         12/31/2012       12/31/2013
    Thesis       Revenues                                 105,702.6     108,345.2     111,053.8       113,830.1        116,675.9
                 EBITDA                                    21,140.5      21,669.0       22,210.8        22,766.0        23,335.2
                 EBIT                                      15,580.6      15,970.1       16,369.3        16,778.6        17,198.0
Business Model   EBIAT                                     11,218.0      11,498.5       11,785.9        12,080.6        12,382.6
                 (+) Depreciation & Amortization            5,560.0       5,699.0        5,841.4         5,987.5         6,137.2
                 (-) Capital Expenditures                   4,000.0       4,000.0        4,000.0         4,000.0         4,000.0
                 (-) Net Increase in WC                       388.0        (895.0)         400.0           400.0          (600.0)
   Industry      Free Cash Flows to the Firm               12,390.0      14,092.4       13,227.3        13,668.0        15,119.7           214,722.0
                 Discount Factor                             0.9159        0.8389        0.7683          0.7037           0.6445             0.6445
                 Present Value of Free Cash Flows          11,348.0      11,821.7       10,162.8         9,618.2         9,745.0           138,393.0
   Sun Deal      Sum of PV of FCFF                        191,088.7

                 Equity Value Calculation
   Internal      Enterprise Value                         191,088.7                Current Market Capitalization                           131,623.7
                 calculation of total debt:                                        Basic Shares Outstanding                                    1,339
                 Current Portion of Long Term Debt                                 Current Share Price                              $          98.30
 Future Dev.     Long Term Debt                             22,689.0               Basic Intrinsic Value per Share                  $        126.89
                 Short Term Debt                            11,236.0               Premium                                                    22.53%
                 (-) Total Debt                            33,925.0
Economic Moat    (+) Excess Cash                           12,741.0                Fully Diluted Shares Outstanding                            1,381
                 (-) Preference Share Value                      0.0               FD Intrinsic Value per Share                     $         123.03
  Valuation      Common Equity Value                      169,904.7                Premium                                                    20.10%
                 Basic Shares Outstanding                     1,339
                 Basic Equity Value per Share           $    126.89
                 Convertible Shares Outstanding
 Risk Factors    Options/Warrants Outstanding                                      Weighted Average Cost of Capital                             9.18%
                 Fully Diluted Shares Outstanding             1,381
                 Fully Diluted Equity Value               169,904.7
 Conclusion      Fully Diluted Equity Value per Share   $    123.03


                 Source: Credit Suisse, UBS
   IBM

     Overview
                                              Sensitivity Analysis
      Thesis
Sensitivity       Sensitivity

 Business Model                                                    Terminal Growth Rate
                             $   126.89         1.50%         1.75%          2.00%         2.25%            2.50%
     Industry                     8.00%   $    144.80   $    149.91 $       155.45 $      161.46   $       168.02
                                  8.75%   $    127.92   $    131.90 $       136.17 $      140.77   $       145.74
     Sun Deal         WACC        9.18%   $    119.73   $    123.21 $       126.94 $      130.93   $       135.22
                                  9.50%   $    114.21   $    117.38 $       120.76 $      124.37   $       128.24
      Internal                   10.25%   $    102.86   $    105.43 $       108.15 $      111.05   $       114.13

   Future Dev.
                  •    The terminal growth rate we selected is on the conservative side – we could have used a
                       rate 100-150 basis points higher
 Economic Moat
                  •    Note the valuation implications of a higher terminal growth rate
    Valuation     •    The current economic situation has resulted in a higher weighted average cost of capital
                       (cost of debt)
   Risk Factors   •    In normal conditions, the IBM WACC might be substantially less, further enhancing
                       valuation gains
  Conclusion
                                     Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                                                                                Comps
    Thesis
                                                                                                                   P/E                          EV/EBITDA
Business Model   Company                                   Share Price   Market Cap ($m)    EV ($m)     LTM       2009E      2010E      LTM       2009E    2010E
                 Cisco Systems                                  $15.88            $92,739    $153,636     19.1x      14.4x      15.6x     11.5x       7.6x     7.9x
                 Hewlett-Packard                                $28.80            $69,120    $130,812     12.7x       8.3x       7.5x      8.6x       5.6x     5.0x
                 SAP                                            $37.53            $44,550     $37,851     17.0x      13.8x      11.9x      9.8x       8.4x     7.2x
   Industry      Oracle Corp                                    $17.11            $86,406    $108,204     15.6x      11.8x      11.3x      9.7x       7.4x     7.7x
                 International Business Machines Corp           $93.05           $124,687   $183,300     12.3x      10.2x        9.4x      8.3x      7.5x     6.9x
                 Average                                                                                 16.1x      12.1x      11.6x      9.9x       7.3x     6.9x
   Sun Deal
                 Source: Bloomberg, UBS

   Internal                                                                                                                 Comparables
                                                                                                                         Valuation Summary
                                                                                                                    P/E LTM                $144
 Future Dev.        •    Considering the wide variety of markets IBM operates in,                                   P/E 2009E              $111
                         we have selected comps from major business lines –                                         P/E 2010E              $114
                         hardware (Cisco, HP), software (SAP, Oracle), consulting
Economic Moat                                                                                                       EV/EBITDA LTM                       $144
                         (HP, SAP, Oracle)
                                                                                                                    EV/EBITDA 2009E                      $94
                    •    Note the substantially higher debt level on IBM vs. comps                                  EV/EBITDA 2010E                      $95
  Valuation
                                                                                                                    Average Value                       $117
                                                                                                                    Implied Return                   23.25%
 Risk Factors

 Conclusion
                                                        Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview       •           Public comps suggest valuation of $95 - $145
                 •           Discounted cash flow analysis implies valuation above $125 given conservative
    Thesis                   cost of capital and terminal growth assumptions
                 •           This suggests capital gains return of ~20%
Business Model

                                                       Summary of Valuation
   Industry
                             $155
   Sun Deal
                             $145

   Internal                  $135
                                                                              Target Price

                             $125
                     Price




 Future Dev.
                             $115

Economic Moat                $105
                                                                              Current Price
                             $95
  Valuation
                             $85
                                             DCF                  EV/EBITDA                      P/E
 Risk Factors

 Conclusion
                                      Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                                            Risk Factors
    Thesis
                 • Economic downturn and declining corporate IT budgets may
Business Model   negatively affect short-term earnings
   Industry          • IBM should continue to generate strong cash flows
                     because companies are looking for ways to cut costs
   Sun Deal
                     • Significant cash position will allow IBM to acquire
   Internal          businesses and increase market share
 Future Dev.         • Services business has $117B revenue backlog for „09

Economic Moat
                 • $18.5B underfunded pension caused by a recent decrease in
  Valuation
                 asset values
                     • Long-term assets are matched with long-term liabilities,
 Risk Factors
                     therefore, it is not a concern
 Conclusion
                              Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                                            Why Invest?
    Thesis
                 • IBM understands the changes happening around the world
Business Model
                     • They have a focused long-term plan led by excellent
   Industry          senior management
   Sun Deal
                 • Valuation has significant long-term upside potential
   Internal
                 • World-class innovation and R&D initiatives
 Future Dev.
                 • Well positioned to participate in the new „green‟ economy
Economic Moat

  Valuation      • Flexible business model allows IBM to readily adapt

 Risk Factors    • Unmatched vision for the future of business
 Conclusion
                               Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                        Recommendation
    Thesis

Business Model

   Industry

   Sun Deal

   Internal

 Future Dev.

Economic Moat

  Valuation

 Risk Factors

 Conclusion
                 Western Investment Club – Created by TMT, March 25, 2009
 IBM

  Overview
                        Recommendation
    Thesis

Business Model

   Industry

   Sun Deal              Buy 50 shares at ~$95.00

   Internal

 Future Dev.

Economic Moat

  Valuation

 Risk Factors

 Conclusion
                 Western Investment Club – Created by TMT, March 25, 2009

								
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