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IBM's Brazil Expansion Continues

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Consistent with its expansion policy in growth markets, tech giant International Business Machines Corp. (IBM - Free Report) recently announced that it has opened three new branches in Brazil. The three new offices, located in the cities of Joinville, Natal and Sao Luis, take the number of IBM branches in Brazil to 30.

The opening of the new branches come at a very opportune moment as Brazil gets ready to host the FIFA World Cup in 2014 and the summer Olympics in 2016. IT spending is expected to increase manifold over the next couple of years as the government continues to invest in overhauling telecommunications and IT infrastructure through programs such as the National Broadband Plan, “the Plano Nacional de Banda Larga”.

We believe that the two major events provide significant growth opportunity for IBM, particularly due to its significant presence in the region. Apart from the three new branches, the company is also expanding its office in the city of Salvador, which along with the cities of Sao Luis and Natal have been the strongest performing regions in the recent times.

Brazil is a major growth market for IBM. The company expects the growth markets to contribute 30.0% of its total geographic revenue by 2015, up from 21.0% in 2010. Brazil is an important member of the BRICS (Brazil, Russia, India, China and South Africa) group, which contributed approximately 19.0% of IBM’s revenue in 2011. The country is expected to grow much faster than most of IBM’s major markets over the next few years. The country’s growth prospect is driven by increasing demand for IT services from different verticals such as banking, telecommunications as well as oil & gas.

IBM has been aggressively expanding into Brazil over the last few years. Although, IBM has a global research lab in Sao Paulo and Rio de Janeiro and has significant presence in these fast growing urban regions, the three new branches reflect the company’s focus on increasing its reach in the untapped regions of Brazil.

As a part of its efforts IBM invested approximately $22.85 million to launch its first corporate public cloud in the country. In April this year, IBM signed a strategic agreement with Brazil-based EBX Group to acquire 20% of SIX Automacao. Besides setting up a research & development (R&D) center in collaboration with SIX Automacao, IBM also agreed to manage EBX’s IT operations, which will add approximately $1 billion to the company’s cash coffers over the next 10 years.

Our Take

Although we remain optimistic on IBM’s policy of expanding its business in Brazil, we remain concerned about the increasing government regulation for U.S.-based companies going forward. IBM, along with other U.S.-based companies, faces tax related issues in Brazil, which may become an impediment for growth in this region going forward.

However, as growth and investment opportunities in the developed countries slow down in 2012 and beyond (the visibility is considerably murkier), we believe that emerging economies of 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 Amazon Inc. (AMZN - Free Report) , Microsoft Corp. (MSFT - Free Report) and Google Inc. as well as 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.

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