AT&T (NYSE:T) recently agreed to sell its subsidiary, Sterling Commerce, to IBM (NYSE:IBM) for $1.4 billion. Sterling Commerce’s software services help businesses securely transfer electronic documents like purchase orders, payroll information, invoices and healthcare claims.
We incorporate Sterling Commerce’s revenues within AT&T’s Investment division which overall accounts for only 0.4% of AT&T’s stock value. We estimate that after selling off Sterling Commerce, which currently has annual revenues of close to $700 million, AT&T’s investments division will constitute only 0.25% of AT&T’s stock.
We estimate that Sterling Commerce is being sold at a fair price and the sell-off will have no impact on AT&T’s stock. The elimination of Sterling Commerce from AT&T’s investments division is offset by an increase of about $1.4 billion cash for the company. The continued decline in investment revenues reflects elimination of Sterling Commerce after mid-2010.
You can modify our forecast above to see how a higher growth in investment revenues can affect AT&T’s stock. Below we discuss why the deal makes sense for AT&T as well as IBM.
Sterling Commerce is a Non-Core Business for AT&T
AT&T is primarily a telecom service provider, and software services offered through Sterling Commerce fall under the company’s non-core business. Sterling Commerce became a part of AT&T when the latter merged with SBC Communications in 2005. SBC had earlier acquired Sterling Commerce in 2000 for $3.9 billion. We believe that selling off Sterling Commerce to IBM is indicative of AT&T’s efforts to concentrate on its core business.
IBM’s Increasing Focus On Software Services
IBM is increasingly focused on improving its profitability by concentrating on high margin software services rather than hardware. The Sterling acquisition can be viewed as part of this strategy, as software products of Sterling Commerce compliment IBM’s middleware portfolio. We estimate that middleware software services now account for 45% of IBM’s stock. The company’s middleware software license revenues have grown at an average annual rate of more than 8% over the last four years.
IBM states in its press release that Sterling Commerce enables more than 1 billion business interactions annually for clients, encompassing industries like finance, retail, and communications. IBM expects these interactions to grow in the future and to benefit from Sterling Commerce’s technology. Moreover, IBM’s large scale presence and brand image can help Sterling Commerce in competing better.
You can see our complete models for the stocks AT&T and IBM here.
