IBM 1997 Annual Report Download - page 49

47
management discussion
International Business Machines Corporation
and Subsidiary Companies
Financing Risks
Global financing is an integral part of the company’s total worldwide offerings. Financial results of global financing can
be found in note Q, “Global Financing,” on pages 65 and 66. Inherent in global financing are certain risks, including
credit, interest rate, currency and residual value. The company manages credit risk through comprehensive credit
evaluations and pricing practices. To manage the risks associated with an uncertain interest rate environment, the
company pursues a funding strategy of substantially matching the terms of its debt with the terms of its assets. Currency
risks are managed by denominating liabilities in the same currency as the assets.
Residual value risk is managed by developing projections of future equipment values at lease inception, reevaluating
these projections periodically, and effectively deploying remarketing capabilities to recover residual values and potentially
earn a profit. In 1997, 1996 and 1995, the remarketing effort generated profits. The following table depicts an approximation
of the unguaranteed residual value maturities for the company’s sales-type leases, as well as a projection of net book
value of operating leases at the end of the lease terms as of December 31, 1995, 1996 and 1997. The following table excludes
approximately $49 million of estimated residual value associated with non-information technology equipment.
Total Run Out of 1997 Residual Value Balance
(Dollars in millions) 2001 and
1995 1996 1997 1998 1999 2000 beyond
Sales-type leases $470 $471 $563 $120 $205 $205 $33
Operating leases 295 480 701 247 266 166 22
______________ _______________ _______________ ______________ _____________ _______________ ______________
Total residual value $765 $951 $1,264 $367 $471 $371 $55
Acquisitions
On April 16, 1997, IBM and NetObjects, Inc. announced
that IBM had purchased a majority interest in NetObjects,
a leading provider of website development tools for
designers and intranet developers. In September 1997,
the company acquired the 30 percent equity interest held
by Sears in Advantis, the U.S. network services arm of
the IBM Global Network. Advantis is now 100 percent
owned by IBM. In December 1997, the company acquired
Eastman Kodak’s share of Technology Service Solutions
(TSS), which was formed in 1994 by IBM and Eastman
Kodak. TSS is now a wholly owned subsidiary of IBM,
offering comprehensive services solutions to its customers.
In addition, the company acquired Unison Software, Inc.,
a leading developer of workload management software,
and announced plans to acquire Software Artistry, Inc.,
a leading provider of both consolidated service desk and
customer relationship management solutions for distrib-
uted enterprise environments.
On March 1, 1996, the company acquired all outstanding
shares of Tivoli for approximately $800 million ($716 million
in net cash). On July 5, 1995, the company acquired all
outstanding shares of Lotus for approximately $3.2 billion
($2.9 billion in net cash). The company engaged a nationally
recognized, independent appraisal firm to express an
opinion on the fair market value of the assets of each of the
acquisitions to serve as a basis for allocation of the
purchase price to the various classes of assets. The
company allocated the total purchase prices as follows:
1996 1995
(Dollars in millions) Tivoli Lotus
Tangible and intangible
net assets $140 $1,157
Purchased in-process
research and development 417 1,840
Goodwill 280 540
Deferred tax liabilities related
to identifiable intangible
assets (37) (291)
__________________ __________________
Total $800 $3,246
Purchased in-process research and development
represents the value of software products still in the
development stage and not considered to have reached
technological feasibility.