In accordance with its expansionary policy, IT major International Business Machines Corp. (IBM) recently opened a couple of new branch offices in Turkey and Poland. The new offices are expected to boost its presence in the fast growing markets of Middle East, Central and Eastern Europe. The two new branches in the cities of Adana and Bursa expand IBM's growing network in Turkey. IBM already has a significant presence in the country with offices in Istanbul, Ankara, and Izmir. In Poland, the new offices are located in the cities of Krakow and Poznan that further expand the companies reach in the country. IBM currently has offices in Wroclaw, Katowice and Warsaw.

The new branches will help IBM to penetrate the regional IT markets and win contracts from both public and private enterprises in different verticals. Further, the new offices will help IBM to support the small and medium sized business sector in the regions. Regional governments are also expected to utilize IBM's expertise in transforming their IT capabilities going forward. This will ensure steady order flow over the long term, in our view.

IBM and Emerging Markets

IBM's policy of expanding into the fast growing regions of Africa, Middle East, Central and Eastern Europe is expected to offset ongoing sluggishness in the Western European markets. According to Gartner, IT spending in the Middle East and Africa is expected to reach $244 billion in 2012, with Saudi Arabia, Turkey and South Africa accounting for nearly 35% of this spending.

Moreover, Central and Eastern Europe are expected to spend approximately $158.0 billion on IT in 2012. Poland's share is expected to be approximately 11.8% in 2012. According to research firm IDC, the Polish IT market will grow at a compound annual growth rate (CAGR) of 4.3% over the 2010-2015 period, achieving a value of $11.82 billion by 2015.

We believe that IBM will continue to focus on consolidating its presence in these emerging markets in order to capture the significant growth potential going forward. Moreover, expansion into these markets will also diversify IBM's revenue base beyond the BRICS (Brazil, Russia, India, China and South Africa) countries, which contributed 19% of its revenue in 2011.

The company has opened nearly 100 new branch offices in non-BRIC regions during 2011. The company has also opened data centers, banking centers and research facilities in a number of African countries as well as in Singapore, Japan, Korea, Hong Kong and Vietnam.

Moreover, IBM is targeting the academic segment through relationships with universities for imparting information technology training to students, thereby boosting its socio-economic relevance in these regions. This is evident from the fact that IBM is already collaborating with a number of Polish universities in order to develop cloud computing technology.

Our Take

IBM expects growth markets to contribute 30.0% of its total geographic revenue by 2015, up from 21.0% in 2010. We believe that IBM's aggressive expansionary policy will help it to achieve this target over the long term.

We also believe that IBM's continued focus on global expansion will provide it with a significant competitive edge over its rivals including U.S. companies such as Microsoft Corp. (MSFT), Accenture plc (ACN) and Hewlett-Packard Co. (HPQ) 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 #2 Rank, which implies a short-term Buy rating.



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Tickers in this Article: IBM, ACN, MSFT, HPQ

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