IBM now more valuable than Microsoft - so what's its secret?

IBM covers all the enterprise IT bases, and presents its company message clearly, unlike other tech leaders such as HP

IBM's value on the stock market climbed above Microsoft's at the end of last month for the first time in over 15 years.

IBM became the world's second most valuable technology company, with a market value of $214bn (£137.4bn) at the end of September 2011, pushing Microsoft's into third place with a value of $213.2bn (£136.8bn).

Apple, which took Exxon's then position as the world's most valuable company back in August this year, is valued at $348.4bn (£226.4bn).

In 2011 so far IBM's share price has climbed by 22 per cent. In the same period, Microsoft's has fallen by just under nine per cent.

According to research firm Ovum's chief analyst, Tim Jennings, IBM is reaping the rewards of being a "mega vendor".

"Mega-vendors are IT vendors that can provide almost everything that enterprise and public-sector IT organisations need from hardware to enterprise applications to infrastructure software to hardware to services," Jennings said.

"By having such a broad portfolio, IBM can – in theory – deliver a highly integrated, and lower-cost solution from the bottom to the top of the IT stack."

Jennings added that the three most important areas of IBM's business are experiencing growth.

"IBM's software, services and hardware businesses are all performing well, and importantly, all three are working well in concert. In key areas such as business analytics and cloud computing, IBM can offer comprehensive services that draw together hardware and software combinations."

On the other hand, Microsoft is feeling the effects of the current lack of enterprise focus on the PC, which for the past two decades has been the cornerstone of its business.

"Microsoft seems to be struggling to innovate for enterprise customers. It is facing the challenge of the PC no longer being at the centre of enterprise IT. It is making a big bet on cloud computing, but hasn't yet been able to articulate a compelling vision," Jennings said.

It's not all doom and gloom for the software giant though. As Jennings points out, Microsoft is doing very well in terms of sales growth, profits, and cash flow. However, enterprise and public-sector IT executives are demanding more strategic suppliers to enable business innovation.

"Because Microsoft has not delivered a compelling strategy and message around enterprise innovation, its future prospects are reduced thus leading to a discount in stock performance."

It's hard to directly compare the two companies because they occupy different areas in the enterprise market. It's not as if a company often has to choose between Microsoft and IBM when making a major purchasing decision. However, Jennings sees IBM as being ahead in certain areas.

"There is a sense in which IBM is better able to deliver on complex IT-enabled business transformation projects," he said.

By contrast, HP has experienced a far shakier 2011 than either Microsoft or IBM. It recently replaced former CEO Leo Apotheker with ex-eBay chief Meg Whitman in an attempt to reverse its fortunes.

One of its stated aims has been to spin off its PC business, something IBM did successfully in 2005. Is HP now trying to copy IBM?

"As a low margin business, there is logic in HP trying to follow the same path, but this is not something that can be done overnight," said Jennings.

"In addition, HP did an incredibly poor job in communicating the potential change in strategy, which led to confusion. IBM is not only a master in acquisitions and divestitures (the PC Division was only one of many divestitures), but in effectively communicating a clear strategy behind every event so that observers would say, ‘Oh, that makes sense'."

While IBM has clawed its way into a marginal lead on Microsoft, both are still significantly behind Apple, whose recent economic growth has largely been down to the impressive sales of its iPhone and iPad devices.

Jennings feels that Apple's position at the top of the technology pile is safe, at least in the short term.

"While Apple's valuation appears to be sky high, actually it is pretty much in line with mature companies if measured by price-earnings (P/E) ratio. IBM's P/E ratio is approximately 14.2 while Apple's is 14.8. So that while IBM can catch up - or Apple drop - this really won't happen for the long term and would require IBM to significantly out-execute Apple."