International Business Machines Corp. (IBM), heaved a sigh of relief after the three companies which manufacture IBM-compatible mainframe hardware and software agreed to drop anti-trust complaints in the U.S. and Europe.
According to the recent 10Q filed by IBM, both T3 Technologies Inc. and Neon Enterprise Software LLC have withdrawn their separate complaints filed with the European Commission.
According to Bloomberg, TurboHercules SAS, the third concerned company, that develops open source mainframe emulation software, has also dropped its charges against IBM.
The legal battle with T3 dates back to 2006, when IBM filed a lawsuit against Platform Solutions, Inc. (PSI) in the United States District Court for the Southern District of New York. IBM alleged that Platform Solutions (T3 was a reseller of Platform Solutions) violated certain intellectual property (IP) rights of IBM.
In 2008, the court allowed T3 to be a part of the proceedings. T3 counter-claimed that IBM violated certain anti-trust laws by refusing to license its patents and trade secrets to Platform Solutions and tying the sales of its mainframe computers to its mainframe operating systems. However, in June 2008, IBM acquired Platform Solutions and both mutually agreed to dismiss all the claims against each other.
In 2009, T3 received an adverse ruling in the case, when the court granted IBM’s motion for summary judgment and dismissed T3’s claims against IBM. Finally, in May 2011, T3 withdrew the complaint filed with the US court. The company also withdrew all charges against IBM in the European Commission, which was filed in 2009.
Neon sued IBM in December 2009 in the U.S. District Court in Texas, claiming IBM interfered with the company’s efforts to license its zPrime emulation software. Neon also filed a complaint against IBM with the European Commission in June 2010.
According to the 10Q, IBM has settled the Texas lawsuit and Neon has agreed to drop its complaint in Europe. Neon has also agreed to stop selling zPrime and the settlements did not involve payments to Neon.
Although the companies dropped their charges, the U.S. Department of Justice (DOJ) is still investigating possible anti-trust violations by IBM, and the DOJ has requested certain information, including the production of materials from the litigation between T3 and IBM.
Moreover, in July 2010, the European Commission also notified the company that it has decided to initiate proceedings to further investigate IBM regarding possible infringement of the European Union competition law.
However, according to Bloomberg, European Union antitrust regulators often drop investigations after complaints from rivals or customers are withdrawn.
European Commission is also investigating IBM’s anti-competitive behavior in the mainframe services arena by maintaining a monopoly over spare parts. A negative outcome can hurt IBM’s sizeable revenue share going forward, in our view.
Recommendation
Currently, IBM stands to dominate the mainframe sector, as most of the competitors have left the field in recent years. Although the company has shifted its focus from hardware toward its more profitable software and services businesses, the mainframe operations are important for IBM as they carry higher gross margins compared to software and services.
However, IBM continues to face stiff competition in the server market from Hewlett-Packard Company (HPQ) and Dell Inc. (DELL). According to the research firm Gartner Inc., IBM hold the #2 spot in terms of revenue, with a market share of 29.7% in the first quarter of 2011. Mainframes, achieved a growth of 19.6% during the same period. HP was #1 with 30.2% market share, while Dell was #3 with 14.9% market share.
We have a long-term (6-12 months) Neutral recommendation on IBM. Currently, IBM has Zacks #3 Rank, which translates into a short-term Hold rating.
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