IBM Ponies Up $4 Billion In Financing For Partner Push

November 26, 2012 Timothy Prickett Morgan

IBM spends billions and billions of dollars on dividends (which is fine) and stock buybacks (which I have a problem with on the scale that Big Blue does it). I spend a lot of time complaining that there are better things that IBM could do with the billions in cash it generates running its business, from investing in new businesses, competing more aggressively on price, or doing acquisitions. Another option, and one that IBM has been doing in the past year, is to help the partner channel and the IT shops it serves get the financing they need to do projects they don’t have the cash to do.

IBM has always been good about financing inventories for the master resellers like Arrow Electronics and Avnet and their downstream partners so they can build a solution and get it into the hands of users and get paid later. As IBM closed its third quarter in September, Big Blue had $23.3 billion in total debt on its books related to its Global Financing unit and a leverage of 7.1. (IBM had another $10.3 billion in real debt from borrowing money at low interest rates and buying back shares at an accelerated pace plus other borrowing it has done while money is so cheap.) The company ended the quarter with $12.3 billion in cash and could clear its “real” debt at any time.

As the quarter came to an end, Global Financing had $25.1 billion in net external receivables of various investment grades, as you can see here:

You may think you need the absolute best credit in the world to borrow money from IBM, but clearly not and clearly IBM gets a much better return from loaning money to partners and IT equipment buyers whose credit is not squeaky clean. (The more risk, the higher the interest rate.) Only 60 percent of Global Financing’s portfolio receivables are at “investment grade.” That doesn’t make IBM a bad company, it is just the reality of the distribution of risk and loans in a normal economy.

In the September quarter, Global Financing’s revenues from external sources fell 9.2 percent, to $472 million, and gross margins were off 1.6 points to 45.8 percent. So why would IBM be pumping more money into Global Financing? Read on.

Those numbers don’t tell the whole story about Global Financing, which had another $491 million in financing revenue internal to IBM in the third quarter, for a total of $963 million. (I don’t know why, but I suspect that there’s a difference between channel inventory and customer financing, and some of this financing stream comes from Software Group, Systems and Technology Group, and Global Services, which are all separate from Global Financing.) In any event, with that combination of external and internal financing revenues, Global Financing booked a pretax income of $476 million, giving it a pretax margin of 49.4 percent. That’s better pre-tax margins than Software Group is showing, and that is saying something.

For the first nine months of 2012, Global Financing has seen external revenues slip 4.9 percent, to $1.48 billion, but add in another $1.49 billion in internal financing revenue and the unit had $2.97 billion in sales and a pre-tax income of $1.52 billion, or a pre-tax margin of 51 percent.

Basically, every dollar you put into Global Financing is going to yield the best bang. Probably better than gambling in the stock market, whether on IBM’s shares or some other company’s shares.

One of the reasons why financing is paying off so well is that business conditions are difficult and capital is scarcer than you might expect. Low interest rates might be good if you are trying to buy a house or lease a Power 795, but they are awful when you are trying to make money off money. Equipment leasing is a relatively good investment because you have the machines as collateral in case something goes wrong. The scarcity of capital and the need to buy expensive systems to remain competitive (or get there in the first place) is why IDC believes that the worldwide IT leasing and financing market will have a compound annual growth rate of 4.4 percent between 2010 and 2015, hitting $148.5 billion by the end of that forecast period.

IBM is also kicking another $4 billion into financing for IT wares because it has helped it win deals and get customers who might have otherwise not done deals engage with IBM and its partner channel. In September 2011, you will recall, IBM launched its “Cost Busters” solutions, stacking up a slew of packed apps and hardware to solve particular problems for SMBs. IBM dedicated $1 billion in cash to Global Financing aimed at lease origination for small and medium businesses that wanted to finance rather than buy those Cost Buster products, and Ed Abrams, vice president of the midmarket business at IBM, says IBM allocated those funds for a year and a half, but the 6,800 companies that took advantage of that Cost Buster financing burned through it in only a year.

So this time around, IBM is doing three different things. First, it is allocating $4 billion–that’s six times as much money over a one-year term compared to the Cost Buster plan–to Global Financing, and setting it at a one-year term instead of 18 months. Second, IBM is opening up its financing to customers of any size in 50 countries, and third, it is only making the new financing available through members of its PartnerWorld channel.

The last bit could turn out to be key not only because it helps distributors, resellers, software vendors, and system integrators peddle products, but because it compels shops to engage with the partner channel. And it rewards partners with a cut of the action, too. (How much, Abrams would not say.) Also, knowing that some customers might want to finance capacity on IBM’s SmartCloud public cloud or those who build clouds using IBM PureFlex systems, managed service providers can also access the financing. Basically, if you are one of the 120,000 members of PartnerWorld, you can do a financing deal.

To take part in the financing, you have to have a deal with at least $5,000 at stake. If you are doing a deal with under $500,000 in financing, then partners can use the Rapid Online Financing Tool, which runs on iOS or Android smartphones and tablets and walks partners through a leasing or a financing proposal and submits it for quick turnaround time from Global Financing. A deal can include IBM wares as well as those from others–Global Financing overall has always been agnostic in this regard, but the Cost Buster deal was restricted to IBM wares. If your credit is good, you will be able to get zero percent financing for the first 12 months through your partner, and if your credit is a bit dicey, you will get market rates. Lease and financing terms are generally for 36 or 48 months these days.

If you want to go directly to IBM to buy a big Power 770, 780, or 790 machine or a System z mainframe, the company has a deal that runs until the end of 2012 that offers six-months interest free on leases for this server gear plus high-end storage, including DS8870, XIV, and TS7700 arrays and the SAN Volume Controller. You can also have IBM buy back your old gear as part of the installation of the new gear.