By Sarah Frier and Maryellen Tighe - Nov 15, 2011 12:48 AM GMT+0700
Warren Buffett, who said he was unable to predict the prospects for Apple Inc. and Facebook Inc., is betting more than $10 billion that International Business Machines Corp. (IBM) is a different kind of technology firm.
Buffett previously focused the stock portfolio at his Berkshire Hathaway Inc. (BRK/A) on consumer brands like Coca-Cola Inc. and financial firms like Wells Fargo & Co. (WFC), saying he was able to understand their business plans. The strategy meant he missed the rally in technology companies like Research In Motion Ltd. (RIMM) and Nokia Oyj (NOK1V) and then their subsequent slumps.
Buffett invested $10.5 billion to $10.7 billion in IBM, betting on the company’s ability to maintain its market dominance in computer services and expand outside the U.S. Armonk, New York-based IBM gained 19 percent in the first nine months of the year as global stock markets plunged.
“Yes, they’re a tech company, but they will not have the wild swings that we’ve seen throughout history, like a RIM or a Nokia where they catapult up but then the technology shifts against them and they plummet,” said Louis Miscioscia, a Collins Stewart LLC analyst in Boston with a “buy” rating on the stock.
Before making the investment, Berkshire surveyed its own information-technology departments to see how they worked with suppliers and found many tended to stick with IBM, Buffett said today on CNBC.
“I probably read the annual report of IBM every year for 50 years,” he said. “I don’t think that there’s any company that I can think of, big company, that’s done a better job of laying out where they’re going to go and then having gone there.”
Bricks, Paint
In March, Buffett said he would prolong his aversion to electronics makers such as Apple, saying he’s unable to evaluate their future. He also said investors should be wary of social- networking websites, saying it is “extremely difficult” to determine their value.
IBM, which sold its personal-computer business more than six years ago, is now focused mostly on services and software for corporate customers. The company’s financial forecasts and a five-year earnings plan distinguish it from technology companies whose performance hinges on the success of products for consumers.
Buffett has shunned technology investments in favor of industrial, financial and consumer-goods holdings in his four decades at Omaha, Nebraska-based Berkshire. He stayed out of the dot-com boom and bust, saying in a letter accompanying Berkshire’s 2000 annual report: “We have embraced the 21st century by entering such cutting-edge industries as brick, carpet and paint. Try to control your excitement.”
Brazil, China Growth
IBM, the world’s largest computer-services provider, targets operating earnings of at least $20 a share by 2015, up from $13.35 the company projects for this year. Software will make up half of total profit in 2015, IBM forecasts. Analytics software, which helps businesses predict trends, is expected to draw $16 billion in sales by 2015, while cloud computing will draw $7 billion, IBM predicts.
Buffett said his holding of about 64 million shares was acquired mostly in the third quarter. That means his company paid about $167.19 on average. IBM rose 0.2 percent to $187.80 at 12:46 p.m. New York time.
Buffett cited IBM’s gains in emerging markets and dominance in the information-technology services market as reasons to invest. Revenue from growth markets, such as Brazil, India and China, will make up at least 30 percent of revenue by 2015, IBM has said, up from 21 percent in 2010.
“As you go around the world there’s a fair amount of presumption in many places that if you’re with IBM that you stick with them, and that if you haven’t been with anybody or are developing things that you certainly give them a fair shot at the business,” he said.
Betting on Rometty
IBM is also investing in products such as analytics software. The company has said it will generate $100 billion in cash flow between from 2010 to 2015 and return 70 percent of that to shareholders.
Last month, IBM appointed Virginia “Ginni” Rometty, 54, as the first female CEO in the company’s 100-year history. She is taking over from Sam Palmisano, who increased earnings by steering the company toward software and services, and disposing some hardware businesses such as PCs.
“She’s explained these plans they have for the next five years. I have no reason to be anything other than positive,” Buffett said. “And they’re batting 1,000 in the last two CEO’s they’ve come up with.”
Mike Fay, an IBM spokesman, referred to Buffett’s comments on the company’s growth plans and said IBM didn’t immediately have anything to add.
Lubrizol, Tesco
Buffett drew down Berkshire’s cash hoard in the three months ended Sept. 30 as U.S. stocks headed for their biggest quarterly decline since 2008. The chief executive officer invested $23.9 billion in the period as he acquired Lubrizol Corp., took a preferred stake in Bank of America Corp. (BAC) and broadened the stock portfolio.
Buffett spent $11.4 billion on equities in the nine months ended September, compared with $3.9 billion a year earlier. The stock purchases this year are in addition to the $5 billion Berkshire spent on Bank of America preferred stock and warrants and the takeover of Lubrizol for about $9 billion.
Berkshire had $68.1 billion in stocks at the end of September. That includes investments of non-U.S. companies, including Germany’s Munich Re and the U.K.’s Tesco Plc.
Buffett also said another technology giant, Microsoft Corp. (MSFT), is “attractive,” adding he doesn’t invest in it because of his relationship with the software maker’s co-founder and fellow philanthropist Bill Gates. Buffett has pledged the bulk of his wealth to the Bill & Melinda Gates Foundation.
“Microsoft is off bounds to us because of my friendship with Bill,” he said.
A Billion a Month
Berkshire’s investable funds were boosted this year as Goldman Sachs Group Inc. (GS) and General Electric Co. returned financing that Buffett extended during the 2008 credit crunch. Cash was also bolstered by earnings at units from the Burlington Northern Santa Fe railroad to the Geico car insurer. The third- quarter investments reduced Berkshire cash hoard to $34.8 billion as of Sept. 30 from $47.9 billion three months earlier.
“The guy has a billion-plus coming in to Omaha” every month, said David Rolfe, chief investment officer of Berkshire investor Wedgewood Partners Inc.
The Standard & Poor’s 500 Index, which fell 14 percent in the third quarter, has advanced 12 percent since Sept. 30.
“If the stock is cheap, we will buy it,” Buffett said in a Sept. 30 interview with Bloomberg Television.
To contact the reporters on this story: Sarah Frier in New York at sfrier1@bloomberg.net; Maryellen Tighe in New York at mtighe6@bloomberg.net
To contact the editors responsible for this story: Peter Elstrom at pelstrom@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net
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