IBM's $5B smart tech investment: What it is and isn't

IBM has pledged to invest $5 billion in smart technologies as defined in the American Reinvestment and Recovery Act (ARRA), but read the fine print before you get in line.

IBM has pledged to invest $5 billion in smart technologies as defined in the American Reinvestment and Recovery Act (ARRA), but read the fine print before you get in line.

Actually, the loans seem more an expansion of what IBM already does - fund large IT projects – than something completely new. After all, IBM claims to be the largest financier of IT projects in the world.

“It’ll only be for IT. We’re not interested in planes, trains and automobiles,” IBM general manager of IBM Global Financing North America Richards Dicks said in an interview this morning. For you history buffs, IBM did stray from IT during WWII when it made M1 carbines and Browning Automatic rifles.

IBM made M1 Carbines during WWII but is STRICTLY IT these days.

The funds are aimed at smart technologies in the ARRA and are intended to bridge the gap between now and when the bulk of the Stimulus money kicks in during the next two years. Smart technologies covered in the Stimulus act include transportation, healthcare informatics, the electricity grid and broadband over power lines, he said.

Examples of projects IBM might consider funding are a utility looking to roll out smart meters or electronic healthcare records companies like Cerner, Siemens or Epic Systems embarking on a major initiative.  Another candidate might be hospital giant Kaiser Permanente (whose data centers IBM took over in March) if it were to expand its myriad electronic healthcare informatics programs.

At the same time, IBM will apply the same standards of creditworthiness it always does.

“We’re only providing funding to companies that pass our thorough standard credit process. We are not giving loans [to companies] with weak credit,” he said, careful to add IBM credit standards remain the same. If IBM tightened its credit standards under the new program, it would defeat its purpose of jump-starting IT projects that wouldn’t otherwise be funded by credit-restrained banks. Hence the program’s name, “Mind the Gap.”

“We hear from our clients every day that they want another [funding] source,” he said. According to Dicks, U.S. banks have lost $600 billion since September resulting in tight credit and high cost of borrowing.

The interest rates IBM charges depends on the client’s credit and Dicks declined to disclose a range. “I hate to quote them because my phone would ring off the hook if I tell you. I can assure you it’s extremely competitive because [the program] is designed [to mitigate] lack of capital,” he said.

Besides low interest loans, funding assistance can take the form of deferred payments, lines of credit or payments that align repayment to revenues generated by the investment. The loans are funded out of IBM operations and show up on the global financing balance sheet as a debt. Like a bank, Global Financing's job is to earn a return on the money and pay it back.

Another point Dicks made is that the funds should not be viewed as venture capital. IBM, he said, has been approached by concerns looking for venture backing after the announcement of the funding program two weeks ago.

“We had a number of people come in for VC loans. [We’re not interested in that.] You remember the dot com bubble?” Dicks remarked. So if you’re from a start-up with a great smart technology idea or product, don’t go to IBM looking for backing. These loans are earmarked for established enterprises many of which already IBM customers.

The patriotic side of this emerged several months ago when Obama Administration officials were pulling together the details of the Stimulus bill. IBM CEO Sam Palmisano told them that a $30 billion investment in certain IT infrastructure segments would create 900,000 U.S. jobs. Apparently, the administration listened because the bets they've made far exceed IBM's recommendation.

One question I asked that didn't get answered was if IBM's Mind the Gap program is to make good after  laying off thousands earlier this year following a terrific fourth quarter. "That's corporate," a spokesman said. "We're Global Financing."

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