Merge to Help IBM Improve Its Watson Capabilities

On Aug. 6, International Business Machines Corporation (NYSE:IBM) announced it would buy health care data and imaging provider Merge Healthcare Inc. (NASDAQ:MRGE). The acquisition of Merge will help to enhance IBM’s Watson cognitive computing system, which has been a key focus for the company in recent quarters.

On July 20, IBM reported its earnings results for the second quarter. Total revenue for the company was $20.8 billion with earnings per share of $3.84 from net earnings of $3.8 billion. IBM’s Watson computing system has been a key initiative for IBM companywide. Watson’s artificial intelligence capabilities are helping improve IBM’s analysis offerings in all of its core business segments. Growth from Watson is expected to be a key catalyst for IBM’s revenue growth overall which has struggled in recent quarters. At $20.8 billion for the second quarter revenue was down 13.5% from the comparable quarter. Revenue for the first half of 2015 was also down from 2014 for a loss of 12.7% at $40.4 billion.

In management’s most recent earnings call, it discussed its prospects for Watson’s revenue growth and some of its main initiatives for the artificial intelligence computing system. In past quarters, the company has been focused on building out its Watson ecosystem to offer new innovations in all of its product lines. Recently the focus has changed to Watson’s deployment. In management’s second quarter earnings comments, it reported the Watson system would now be introduced in 30 countries and 20 industries.

Globally, the company’s Watson open power strategy is important for its success. IBM’s Watson open power strategy was recently endorsed by the U.K. government which will now utilize it to improve analysis of data for the country’s productivity and growth. Further developments from the Watson system’s cognitive computing and analysis capabilities are likely to ensue allowing for infinite revenue opportunities for IBM.

In April, IBM reported that it would be creating a Watson Health business, further building out its Watson capabilities. Along with the Watson Health business, the company initially added two acquisitions that would fuel growth of the Watson Health business. The two initial Watson Health acquisitions included Phytel and Explorys.

The company’s most recent report on August 6 to acquire Merge further builds on Watson’s capabilities in the health care industry. In the health care industry, Merge is known for its data and imaging platform. For Watson, Merge will add the capability to utilize images providing for advanced image analytics through Watson’s cognitive analysis capabilities. The advanced data and imaging capabilities from Merge overall are expected to significantly improve revenue in IBM’s Watson Health business.

IBM plans to buy Merge for $1 billion in cash, which is the equivalent to $7.13 per Merge share. On the day of the announcement, Merge’s stock closed at $7.10. The Merge deal is expected to close later this year following shareholder and regulatory approvals.

The acquisition of the new company is expected to help increase revenue growth across IBM’s main business segments and specifically within its Global Technology and Business Services divisions. The value add to the Watson Health business will be significant for the company. Further, acquisitions pertaining to enhancements for Watson’s capabilities are also likely to follow, as Watson continues to be a key focus of revenue growth for IBM.

The announcement of the Watson Health initiative specifically should also help to improve IBM’s stock price which has continued to struggle recently. Year-to-date the stock is down 3.32%. Synergies from the IBM Merge deal should help IBM as well as benefit its fair value which appears to be just below its current market price at $154.84 versus $157.28. Warren Buffett is one investor who continues to have confidence in the long-term value of IBM’s stock. IBM is Warren Buffett’s fourth-largest portfolio holding at 9.63% and he currently owns 8.12% of the company’s outstanding equity shares. For the long-term, analysts are also bullish on the stock and its growth prospects. Currently analysts have an average target price for the stock of $160.18 with a high target of $198.

About the author:

Julie Young

Julie Young is a financial journalist with comprehensive experience in the financial services industry. She primarily writes article publications on financial market news and economic trends. Julie holds a Master of Science degree in finance from Boston College and a Bachelor of Science degree in finance from the University of Arkansas.

Source: Merge to Help IBM Improve Its Watson Capabilities

Via: Google Alerts for AI