Betting On Africa: IBM

Photo by IBM

Many multinational corporations boast expansive – and expanding – African operations, which offers an investor numerous ways to participate in the continent’s growth story. In this series, we’ll take a look at how these household names engage African markets and its impact on the corporate bottom line.

 

IBM’s (Ticker: IBM) presence in Africa dates back more than 50 years, but it’s a much different company now than it was back then. Big Blue has evolved from a computer manufacturer into a one-stop IT solution, well-suited to the African context. Got an inefficient power grid? They can help with that. Is your bank’s computer network slow as molasses? They can fix that, too.

Capabilities like these have made the company a major player in Africa where much of the IT infrastructure is obsolete – if it exists at all. With the recent opening of branch offices in Senegal and Tanzania, IBM now operates subsidiaries in 20 African countries. The company has invested more than $300 million in the region since 2006.

This big bet is now paying off. Late last year, IBM won a major contract to supply Bharti Airtel with the technology it needs to extend its cell phone network deep into the continent’s countryside. Analysts estimate the 10-year deal to be worth in the neighborhood of $1.5 billion.

And there’s a lot more opportunity where that came from. Undersea fiber-optic cables landed on the East African coast in 2010. Their arrival paved the way for a multitude of IT systems that would previously have been infeasible. IBM believes developments like these will expand the African IT market from its present size of $8.5 billion to $12.5 billion by 2015. That’s growth of nearly 12% per year.

How significant is Africa’s contribution to IBM’s corporate sales? This is an exceedingly difficult figure to ascertain. You see, IBM doesn’t break its financial results down by country – or even by continent. Instead, it consolidates its African figures with its European and Middle Eastern results. (I’m sure there is a very good reason for this apart from frustrating the occasional Africa business writer. But it would seem the company could provide a bit more granularity in its sales figures and still avoid revealing strategically-sensitive data to its competitors.) The company does, however, drop enough hints to be reasonably certain that African sales represent less than 5% of the corporate total.

Does that mean IBM’s Africa operations are insignificant from an investment perspective? Certainly not. Without its business in Africa and other emerging markets, IBM’s 2010 sales growth would have been an anemic 1.0% instead of the actual 3.3%. That’s a substantial difference for such a behemoth of a company, and it helps to justify the stock’s 2.0 price/sales ratio.

Perhaps more importantly, the continent’s lack of infrastructure provides fertile ground for innovation. Unconstrained by legacy IT systems, IBM can design and implement cutting-edge technologies for its African clients that will ultimately create positive spin-offs for the corporation as a whole.

Disclosure: At the time of publication, Ryan did not own shares of any company mentioned in this article.

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Comments

  1. Nice article.

    Absolutely true. Without Africa’s involvement most of these multinational corporations wouldn’t exist today, yet there is still not much recognition that Africa is a key player in international markets and will remain so for many years to come for existing and upcoming corporations and Western Governments.

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