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Monday, 24 November 2014

Old tech

IBM bet doesn't mean Buffett's tech spots changed

Warren Buffett’s well-known aversion to tech stocks got Twitter feeds chirping about his disclosure on Monday that Berkshire Hathaway had amassed a $10.7 billion stake in IBM. But the move says more about the evolution of Big Blue’s investment profile than it does Buffett’s.

Despite jettisoning its PC business seven years ago, IBM still remains a part of the technology landscape. But to broadly portray the company as part of the same family with Apple and Google hardly captures just how much it has matured.

IBM was once more closely associated with the cutting edge of supercomputers, for example creating the first one to beat a human being at chess. Just a few months ago, however, IBM walked away from Blue Waters, a next-generation project that could, for example, crack the code on tornado formation. Younger Cray instead picked up the deal, in an announcement that came hours ahead of Buffett’s.

That doesn’t make IBM an also-ran but underscores what the Oracle of Omaha might see – and not see – in this tech departure. Big Blue is now a predictable, well-branded consulting and services firm.

Unlike many plucky upstarts, IBM has a long-term plan, one it outlined in detail back in March when Buffett says he began buying shares. Second, the company’s management looks steady for its industry, if the smooth CEO succession unveiled last month is any gauge. Investors hardly blinked last month when IBM promoted an insider, Virginia Rometty, to take over from Sam Palmisano.

Finally, IBM also looks cheap, in contrast to the frothy multiples that often characterize stocks in the sector or Big Blue’s peers. IBM trades at 14.8 times earnings, according to Thomson Reuters data, compared to Oracle’s 18.4 times and Accenture’s 17.4. The tech industry trades at a median multiple of 21.9.

These are all the sorts of characteristics that attract value seekers like Buffett. Technically speaking, IBM may be an unusual foray into technology. But an octogenarian investor isn’t likely to change his spots. The stake Buffett bought explains how IBM’s have.

Context News

Berkshire Hathaway said on Nov. 14 he has amassed a 5.5 percent state in IBM. “I don’t know of any large company that really has been as specific on what they intend to do and how they intend to do it as IBM,” Buffett said on CNBC. Berkshire bought 64 million shares beginning in March, paying $10.7 billion for the stake.

In August, IBM pulled out of a $300 million supercomputer project due to costs and technical concerns. Seattle-based tech firm Cray Inc will take over the University of Illinois project, the company said on Nov. 14.

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