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Objective: In this paper, we will evaluate the rating of an International Business Machine (IBM) debt and compare our rating to that of Moody s rating. We will look at the firm s qualitative aspects as well as its quantitative. Qualitative aspects include relevant ratios such as. Quantitative aspects include an audit of industry risk, the firm s operating environment, its market position (size and market share) and management.
General Description of the Bond: On January 8 1998, International Business Machine (IBM) offered US$ 700 million worth of debt. The sale s proceeds will be used for general corporate purposes. The bond s cusip # is 459200 AS 0. It has a 6. 5 % coupon rate to be paid semiannually. The senior debt is due to mature on 2028.
The debt does not have any collateral, sinking funds or provisions. Quantitative factors: Qualitative factors: Industry risk Over the past two decades, the computer industry has expanded at a tremendous pace. Driven by fast technological advances in semiconductor logic and memory, storage devices, networking and software, the change of the computer marketplace has changed the nature of computing from centralized, mainframe data processing to a distributed, network centric focus. Also, the globalization of the U. S.
computer industry has proceeded; manufacturers including IBM have moved abroad to take advantage of the lower labor rate in countries such as China, Malaysia, Philippine and Thailand. Competition in the computer industry has traditionally been intense and that will continue. Lower-cost components, particularly microprocessors, dynamic random access devices (DRAM) and displays have fueled it. Fueled by increasing foreign competition, the U. S. computer industry has been forced to make enormous improvements in the price / performance ratios of their systems.
For example, IBM introduced its first PC in 1981, which was priced at US$ 4, 500. That system had limited power, no hard drive, very limited processing power, one operating system, and no cache memory. Today, IBM s low-end series are sold for less than $ 1, 000 and have more than 40 times the processing power of their first PCs. The price / performance trend is expected to continue through the end of the century, with significant price declines expected in the low-end computer systems. Certain U. S.
trade policies should have a continuing positive effect on the U. S. computer makers. Exports are expected to rise because of greater access for U. S.
suppliers to key overseas markets and improving the enforcement of intellectual property rights. Figure 1: Computer Industry Trends and Forecast by the U. S. Department of Commerce Percent Change 1994 1995 1996 1997 1998 96 - 97 97 - 98 (forecast) Sales 155, 189 187, 808 230, 722 261, 985 300, 000 13. 5 14. 5 Operating Margin (%) 14. 7 16. 2 13. 8 14. 6 13. 5 Depreciation ($mil) 9581. 4 9278. 2 9991. 4 11175 11000 Income Tax Rate 36. 1 34. 7 33. 9 32 32 Computer &# 038; Peripherals Trends &# 038; Forecasts (millions of dollars, except as noted) The U.
S based computer industry s sales had grown to $ 230 billion in 1996, and was expected to grow continuously at the rates of 13. 5 % and 14. 5 % respectively in 1997 and 1998 (see Figure 1 for detail). Domestic demand has doubled to US$ 114 billion, with imports of US$ 60 billion. Computer systems have been the principal reason for the growth in U. S. based computer equipment production. In conclusion, the computer industry is a very competitive industry with many large firms competing for market share.
However, the industry is in the midst of incredible growth; IBM is in an excellent position to take advantage of the growth in the industry and increase their market share. Operating Environment IBM is the world s largest and most diversified technology company, with five primary business segments hardware, services, software, maintenance, rentals and financing. The hardware divisions accounted for 46 % of revenues in 1997. The division manufactures and sells products ranging from mainframe computers to personal computers, servers and storage devices. The service division is the largest information technology services provider in the world; it provides product support, global network services, consulting, outsourcing, systems integration, education and training. The software division develops and markets applications and systems software for host and distributed systems such as Lotus Notes.
The rental and financing divisions (IBM Global Finance) support IBM s core business lines. Market Position Rankings as of September 1 1998 Industry Ranking Ranked out of 3, 372 Annual Sales 1 Employees 1 Employee Growth -last year 1998 (projected) 708 1, 942 Figure 2: web From looking at figure 2, IBM is ranked first in terms of sales in its industry. Size of the company is very important when judging credit risk. IBM s staying power is not debatable and risk of default is minimal.
Also, the large number of employees signals the large bank exposure to the firm; which in turn signals the reluctance for banks to abandon IBM. Management On April 1 1993, Louis V. Gertsner Jr. became IBM s chairman and CEO. Gertsner is the first CEO to be appointed from outside IBM s ranks. His credentials are impressive, he was chairman and CEO of RJR Nabisco for four years and previously spent 11 years as a top executive at American Express.
Through his leadership, IBM went through a successful reorganization. IBM rebuilt its product line to take advantage of technological advances, shrunk its workforce and made significant cost reductions. Furthermore, his most important achievement is the decision to keep IBM together despite mounting pressure to divide IBM into separate, independent companies. He believed that one of its main competitive advantages was being able to provide integrated solutions for customers. Dividing the company would have erased that advantage. Furthermore, IBM s management should be commended for was the way they position the firm to take advantage of the rise of the Internet and network computing.
The management has also shown good judgment in their acquisition of Lotus Development Corp. and Tivoli Systems Inc. These acquisitions helped IBM s service decision become the fastest growing segment of the company, with growth at more than 20 % per year. IBM s financial decisions have also been keen.
In 1993, IBM decided to cut its common dividend. The stock price dropped a bit, however, that decision has saved them over US$ 7 billion to date in avoided cash outlays and lowered its annual dividend commitment to approximately US$ 570 million from US$ 2. 8 billion. In 1996, the company spent more than US$ 6 billion to repurchase approximately 63 billion common shares. IBM s management s track record has been impeccable the past 5 years in terms of its ability to create a healthy business mix, maintain operating efficiency and strengthen market position. Furthermore, the successful reorganization proves the management extremely credible.
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Research essay sample on Technological Advances Computer Industry
