IBM Targets Growth in Russia

In a bid to strengthen its position in Russia, IBM Corp. (IBM - Analyst Report) is expected to open 10 more offices across the country and the Commonwealth of Independent States (“CIS”). IBM will open its branches in the cities of Voronezh, Ufa, Khabarovsk, Tyumen, Chelyabinsk, Nizhny Novgorod, Samara and Krasnodar in Russia. Moreover, IBM also plans to open offices in two Ukraine cities, namely Kharkiv and Donetsk.

IBM has been partnering with various companies in Russia to modernize its operations in an efficient and cost-effective manner. IBM has also joined with various businesses to help them in their expansion strategies. Companies with varied operations, ranging from engineering to healthcare, financials, retail and education are IBM’s clients. In the current year, IBM intends to partner with more than 4000 businesses across the stated regions.

To fund its expansion plans, the company expects to invest $6 million through 2012. IBM will also hire local staff to cater to the growing needs and challenges of its clients in the region.

The decision to invest its resources in Russia and CIS regions is supported by the fact that the country’s real GDP has increased by 67% since 2000, according to research and analysis firm Economist Intelligence Unit, a business unit of The Economist Group.

According to Bloomberg, Russia’s economy in the last quarter grew at the fastest pace since the three months ended September 2011. The growth came on account of robust retail sales that offset slower production in mining. The Federal Statistics Service in Moscow noted that Russia’s GDP grew 4.9% in the first quarter from the year-ago period.

Moreover, IT spending in Russia was $32 billion in 2011, which is expected to rise to $35.5 billion in 2012, according to IDC estimates. Separately, Gartner expects Russia's share of IT spending to be approximately 45% of the total spending in Central and Eastern Europe. The research firm expects IT spending in the region to touch $158 billion this year. Thus, IBM is well on track to capture the billion dollar opportunity that the region presents.

IBM has significant exposure to the BRICS (Brazil, Russia, India, China and South Africa) countries, which contributed 19% of its revenue in 2011. In the first quarter of 2012, IBM continued to witness strong growth from BRIC countries (up 10.0% reportedly/11.0% on a constant currency basis).

Although we remain optimistic about IBM’s policy of expanding its business in Russia and the CIS, we remain concerned about the current economic pressures in the region.

However, as growth and investment opportunities in the developed countries slow down in 2012 and beyond (visibility is considerably murkier), we believe that emerging economies of BRIC, Africa, Latin America and the Asia-Pacific will play a key role for IBM.

We also believe that IBM’s continued focus on global expansion will provide it a significant competitive edge over its rivals including U.S. companies such as Microsoft Corp. (MSFT - Analyst Report), Accenture plc (ACN - Snapshot Report) and Hewlett-Packard Co. (HPQ - Analyst Report) and also over smaller local companies operating in any given region.

We have a long-term Neutral recommendation on the stock. Currently, IBM retains a Zacks #3 Rank, which implies a short-term Hold rating.