International Business Machines Corp. (IBM) announced that its lending and leasing business segment – Global Financing – has entered into a financing deal with Advanced Micro Devices, Inc. (AMD) and its distributor network to provide necessary credit and financial assistance to China’s Tianjin region.
 
IBM clinched a deal with AMD to launch its first financing business in China. Under the agreement, IBM will factor AMD sales receivables in China and offer the latter upfront payment while they typically wait up to four months to receive customer payments. This will be IBM’s first factoring operation in China.
 
IBM’s spokesperson said that the deal with AMD would result in “hundreds of millions” of dollars in profit for IBM this year. The company also anticipates adding new customers for the financing unit.
 
Last year, the Tianjin Government granted an exclusive license – the first of its kind in China to IBM’s Global Financing unit to provide accounts-receivable lending (also known as factoring) in the Tianjin Binhai New Area, a key economic development area.
 
With this new factoring license, IBM has established a new operating entity called IBM Factoring (China) Company Limited. This new IBM entity will help businesses operating in the country smooth out the time lag between invoice and payment. This will help IBM grow its lending operations and attract more customers.
 
In 2008, the company’s global financing business had an asset base of $36 million and approximately 9% of IBM’s profit came from its financing business, including factoring in 2008.
 
AMD and IBM have collaborated for years on a series of processor and server. The move highlights the fact that IBM is trying to recover its Global Financing business, which saw a revenue decline of 15% (13%, adjusting for currency) in the third quarter to $536 million.
 
IBM is focusing on high-growth, high-value segments of the IT industry, such as IT lending. This prompted management to sell the PC manufacturing operation in China to Lenovo earlier. Thus, IBM’s new initiative to migrate towards service, consulting and financing businesses in China from its original core PC manufacturing business, is viewed as a positive.
 
We expect IBM’s growing strategic focus to help it deliver both top line growth and margin expansion. While IBM stands to benefit from cost-cutting measures, strong liquidity position, operational efficiency, substantial free cash flow and earnings momentum, low growth in some of its segments, continued decline in hardware and rising pressure in its Services business would damage IBM’s growth in the near term. Thus, we maintain our Neutral rating on the stock.
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