By Palash R. Ghosh: Subscribe to Palash's RSS feed
October 3, 2011 5:38 PM EDT
Last week, International Business Machines Corp. (NYSE: IBM) became the second-largest technology company in the world, second only to Apple Inc. (Nasdaq: AAPL).
More importantly, Big Blue supplanted Microsoft (Nasdaq: MSFT) for second place -- marking the first time in fifteen years that IBM surpassed Microsoft in size.
As of Friday’s close, IBM’s market cap amounted to $208.84-billion, just a nudge above Microsoft’s $208.54-billion. (Apple is far ahead at $353.52-billion).
Microsoft itself ceded its top tech spot to Apple just last year.
This crossing of paths might suggest a longer-term trend for these two iconic companies – IBM, once the premier tech corporation in the world decades ago, has somehow engineered a stunning resurgence to prominence; while Microsoft (the darling of tech investors during the 1990s) has been going nowhere.
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Consider that since July 1, 2002 (the same year that IBM named Samuel J. Palmisano to replace Louis Gerstner as chief executive) IBM shares have tripled in value, while Microsoft stock has barely budged.
Year-to-date in 2011 through Friday, IBM shares have jumped 18.6 percent, while Microsoft’s valuation has dropped about 11 percent.
Why this divergence in fortunes?
Part of it is due to investor perception, but another part lies with the fact that IBM made some bold steps to reconfigure their entire company, while Microsoft seems stuck and unable (or unwilling) to innovate beyond its core Windows/Office software business.
David Smith, chief investment officer of Rockland Trust Investment Management Group, in Rockland, Mass., said that the dramatic turnaround by IBM may be traced to its audacious decision in May 2005 to unload its famed (but low-margin, commoditized and aging) personal computer business to Lenovo Group Ltd. of China and focus instead on (higher-margin) technology services, business software and premium hardware businesses.
“At the time, the move to sell the PC unit was applauded by Wall Street, but no one could have foreseen how successful IBM would become thereafter,” he told International Business Times.
Indeed, according to reports, IBM derived 44 percent of its pre-tax profit last year from software, up from a 25 percent figure in 2000.
Similarly, Ted Schadler, principal analyst at Forrester Research, told Bloomberg: "IBM went beyond technology. They were early to recognize that computing was moving way beyond these boxes [PCs] on our desks."
Under Palmisano’s tenure, IBM has increased its profit figures for more than 30 consecutive quarters.
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