Hot Stocks: IBM Simplifying and Succeeding While Oracle is Struggling

While its chief competitor Oracle Corp. (Nasdaq: ORCL) is laboring to smooth out the wrinkles in its merger with Sun Microsystems Inc. (Nasdaq: JAVA), International Business Machines Corp. (NYSE: IBM) is streamlining its core business and fulfilling its mandate for innovation.

IBM – which  itself attempted to buy Sun but balked at the hefty price tag – has been spared the regulatory scrutiny that comes with trying to merge to large global businesses. And instead of complicating its business, IBM is getting back to its roots in mainframes and virtualization – which means focusing on storing and processing data.

In fact, IBM recently announced the release of 10 new software products all designed to improve the performance and increase the cost efficiency of its System Z mainframe.

"We've seen improvements in scale in our zSeries mainframes running Linux, along with networking connectivity and bandwidth and virtualization," IBM Chief Information Officer Pat Toole told Forbes. "It's the hardware, the entire software stack and the services. In addition, we have a couple of green data centers in Raleigh and Boulder that dramatically improve their efficiency."

Toole said his company has consolidated from 150 data centers down to five and reduced the number of applications the company runs from about 16,000 to 4,500.

"I have to transform our processes and deliver operational excellence, top to bottom, to our employees. Business analytics is a top priority," he said. "We took out about $3 billion in costs over the last three years in shared services and global integrated processes."

Toole pointed to business analytics as a top priority. To that end, IBM earlier this month launched the world's largest private cloud-computing platform. Dubbed "Blue Insight," IBM's Smart Analytics Cloud combines the resources of more than 100 separate systems to create one large, centralized repository of business analytics. It hosts more than a petabyte – equivalent of 100 times the content of the Library of Congress – of Business Intelligence (BI) data.

And while it was initially designed to increase efficiency within the company, the bounty of information within the cloud has been made available to roughly 200,000 clients.

IBM says on its Web site that "cloud computing represents a paradigm shift in the consumption and delivery of IT services," and CIO Tool called it "critical" to the company's business.

"I expect this first of its kind approach will help drive both new growth opportunities as well as have a significant impact in cost savings, which is exactly what businesses are asking today of their cutting edge IT organizations," said Toole.

The use of cloud computing in general has been spreading rapidly over the past few years, as companies look for ways to increase operating efficiency and data security. The cloud industry, which is in its infancy, will generate $3.4 billion in sales this year, according to Gartner Research.

However, Merrill Lynch analysts estimate that by 2011 the cloud computing market will reach $160 billion, including $95 billion in business and productivity applications. That makes the cloud industry one of the fastest growing markets in the world, as well as one of the most competitive.

In addition to IBM, heavyweights like Google Inc. (Nasdaq: GOOG), Microsoft Corp. (Nasdaq: MSFT) and Amazon.com Inc. (Nasdaq: AMZN) have all weighed into the cloud-computing arena.

Of course, now that Oracle's acquisition of Sun has hit a snag, IBM is hardly quaking. In fact, Oracle's planned $7.4 billion purchase of Sun Microsystems may not even make it past European antitrust officials because of concerns that Oracle might eliminate Sun's MySQL open-source database.

"Oracle has strong incentives to adopt a commercial and technology strategy for MySQL which prevents it from cannibalizing Oracle's significant revenues from proprietary offerings," the European Commission (EC) said in a statement of objections to the deal.

It's possible that Oracle will have to spin off Sun's MySQL to accommodate the EC, which has until Jan. 27 to reach a decision on the deal. And as time wears on Oracle's business continues to suffer.

IBM has lured more than 250 customers from Sun to its own computer systems since the beginning of the year, while Hewlett-Packard Co. (Nasdaq: HPQ) says it signed deals with more than 100 Sun customers

"The longer [the closing process] wears on, the more Sun's business deteriorates, and the more market share IBM and Hewlett-Packard take away," Partrick Walravens, an analyst at JMP Securities Inc. (NYSE: JMP), told BusinessWeek.

Meanwhile, IBM Senior Vice President Steve Mills told TheStreet.com that the reason Oracle was willing to pay $9.50 a share for Sun, which is currently trading at about $8.50 sense a share is that "he didn't understand the hardware business."

"It's a very different business from software," he said.

"We're in this for the long haul," Mills added, noting that IBM has been competing with Oracle since 1993. "All of our market share comes at the expense of Oracle's. And we love to do benchmarks against Oracle."

IBM Focuses on Another Fast-Growing Market

Not being bogged down by a bulky takeover of Sun has freed IBM to focus on growing more efficient and investing more time and money into its cloud-computing initiatives. But cloud computing isn't the only fast growing market IBM is looking to tap into.

IBM is also pushing new projects in China, where it has had a presence ever since it sold a punch card tabulator to a Beijing hospital in 1934.

China, now the world's third largest economy, has come a long way since 1934. And as it continues its whirlwind modernization, it must confront logistical problems in its infrastructure. And that's where IBM, a company that prides itself on innovative problem solving comes in.

IBM is currently experimenting with possible solutions to traffic congestion in crowded urban centers like Shenyang. Min Wanli, a researcher in IBM's Beijing research lab, told Forbes magazine that he can predict the time and location of a traffic jam with 85% certainty up to an hour in the future by using China's elaborate network of traffic cameras and road sensors.

"The government has already spent billions around the country collecting this data," Min said. "We just need to make sense of it."

In addition to alleviating traffic problems, IBM hopes the Chinese government will rely in on its expertise to develop more sophisticated and reliable energy transmission systems and railroad networks.

Beijing has launched some $656 billion in stimulus measures since last year, including $400 billion in infrastructure spending, according to the China Center for Information Industry Development. About $2.3 billion of that will go to information technology aimed at the power grid and $2 billion to data systems for rail, all to be spent in 2010.

"Every level of government in China is talking about this," Thomas Li, IBM's head of research in China, told Forbes. "They have the need. We have the ability."

IBM will be served well by its focus on energy efficiency. China is the world's largest emitter of greenhouse gas and soaring demand for energy has strained supply. But IBM is one of the most eco-friendly technology companies on the planet. Eighteen of the 20 most energy efficient supercomputers in the world at build with IBM hardware. In fact, the company holds 69 of the top 100 positions on the Green500 list.

Also, several of IBM's top executives – including Bradley Gammons, the company's head of energy and utilities sales, and Keith Dierkx, IBM's senior railroad executive – this year moved to China to ensure the company's newest initiatives are followed through on and that its ties to the central government remain strong.

"The government has a strong arm," Claudia Fan Munce, the head of IBM's venture capital group, told Forbes. "But right now they're focused on innovation. And so are we."

News and Related Story Links:

• IBM:
  Cloud Computing with System z

• Forbes:
  IBM: Back To The Future

• Money Morning:
  Hot Stocks: Oracle's Future Clouded by Sun Takeover Complications

• TheStreet.com:
  IBM Savors Oracle-Sun Delay

Tags: Hot Stocks, IBM, Oracle Corporation