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IBM to Create Watson Financial Services with Promontory Buy

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Shares of International Business Machines Corporation (IBM - Free Report) have been steadily inching higher over the last 12 months. The company’s stock provided a moderate return of 9.7% compared with the S&P 500’s 8.7% over the same period. 

The upside can be primarily attributed to IBM’s investments in cloud computing, Big Data, mobile and security that have started to gather steam of late. In the last reported quarter, “Strategic Imperatives” revenues of $8.3 billion formed over 40% of total revenue with Cognitive solutions reporting growth of 3.5%. Also, IBM’s history of strategic acquisitions/deals, which has increased its scale of operations globally, will bolster growth.

Meanwhile, the company announced that it is buying Promontory Financial Group, a financial consulting firm based in Washington.

IBM is making the acquisition in a bid to broaden the reach of its artificial intelligence division, Watson into analysis of financial regulations and provide the most appropriate course of action to financial institutions. The merged unit will be called Watson Financial Services.

The financial details of the deal were not divulged. IBM said it expects to wrap it up by the end of 2016.

Why this Move?

Over the past four years, IBM’s revenues have been steadily declining due to a sluggish computer business. To counter the situation, IBM has been trying to diversify by foraying into new business areas such as cloud services and analytics. The company is investing aggressively in these emerging sectors through acquisitions. Reportedly, IBM spent nearly $5 billion in the first half of 2016 alone for such acquisitions.

About Promontory

Founded by Eugene Ludwig (who was once a top-notch banker himself), Promontory has over 600 employees worldwide, many of whom were former regulators. They now provide consulting services to the banks that they worked for in the past.

How will this Acquisition Help IBM?

By acquiring Promontory, IBM intends to position itself as a major market player to help banks cope up with a fast changing regulatory environment. IBM estimates the sector to be worth nearly $270 billion a year.

IBM Watson Financial Services has the potential to enable its clients to lower their regulatory compliance costs substantially and hence has good prospects of growth in the long run.

Zacks Rank & Key Picks

At present, IBM carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology space are eGain Corporation (EGAN - Free Report) , Shutterfly, Inc. (SFLY - Free Report) and Intel Corporation (INTC - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Notably, estimates for eGain for the current fiscal year have narrowed down from a loss of 25 cents to a loss of 21 cents.

Earnings estimates for Shutterfly for the current year as well as next year have remained steady at 56 cents and $1.05, respectively.

On the other hand, earnings estimates for Intel for the current year and the next have been revised to $2.61 and $2.83, respectively recently.

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