IBM Tops Microsoft in Market Value

International Business Machines Inc. topped rival Microsoft Corp. in market valuation for the first time since 1996, the latest sign of the technology industry’s shift in emphasis away from the personal computer.

The reversal comes more than a year after Microsoft lost its crown as most valuable technology company to Apple Inc. Microsoft’s market value peaked in late 1999 around $600 billion and has trended downward ever since, as the company has failed to replicate its dominance of PC software in markets like Internet search and mobile.

Meanwhile, IBM, which marked its 100th anniversary in June, has completed a remarkable makeover during the past decade, recovering from the loss of what had been a near-monopoly in computing.

During the past year, IBM’s shares have risen 34%, compared with a 3.9% gain for Microsoft.

Microsoft, the most valuable technology company more than a year ago, now ranks third, with a market capitalization of $213.2 billion at Thursday’s close, according to FactSet Research. IBM is now worth $214 billion. Both trail Apple, whose market value has soared to $362 billion on the back of huge demand for its iPhones, iPads and Mac computers.

IBM Chief Executive Samuel J. Palmisano made tough decisions to dump cherished businesses like IBM’s PC division and bulk up in technology services, business software and premium hardware—complex lines of business that are hard for competitors to replicate and carry high profit margins. The moves by the IBM lifer who took over from Louis Gerstner in 2002 allowed the company to find new life in the post-PC era.

The company still has a valuable computer-hardware business. But Mr. Palmisano’s efforts to diversify Big Blue are evident in software, which contributed 44% of the company’s $20.78 billion in pretax profit from its operating segments last year, up from 25% in 2000.

Microsoft and IBM’s shares have charted opposite paths over the past 11 years. Microsoft’s shares have fallen since Steve Ballmer took the reins of CEO from chairman and co-founder Bill Gates in January 2000.

The decline reflects growing investor concern about Microsoft’s fumbles in new, high-growth markets like Internet search, mobile phones and, more recently, tablet computers, where competitors like Apple and Google Inc. have shined. Investors also worry that growth rates for mainstay Microsoft businesses like Windows and Office could be in jeopardy as alternatives from Apple and Google gain ground.

IBM’s stock is up over the same period. The company has a long string of profitable quarters and has managed to get its revenue growing again. Since it is so large and complex, IBM has historically struggled to fire on all cylinders. But, recently the company’s older businesses and major growth areas such as emerging markets and business analytics have each done well.

IBM has been climbing out of a hole that it dug 30 years ago when it unwittingly helped to launch Microsoft. Until the advent of the personal computer in the 1980s, IBM and its giant mainframe computers dominated the computer industry.

Then, in one of the shrewdest moves in the annals of business, Microsoft cofounder Mr. Gates cut a deal with IBM in which Big Blue relied on the tiny software company to provide an operating system for its new PC. Mr. Gates managed to convince IBM to let Microsoft retain the rights to the operating system, providing the foundation upon which Microsoft built its Windows empire.

While acknowledging past mistakes, Mr. Ballmer has said his primary focus as CEO is on things he can directly control—including profits and sales—rather than share price. On that score, he has performed far better, increasing Microsoft’s net income to $18.76 billion on revenue of $62.48 billion for the fiscal year ended June 30, 2010, from net income of $7.35 billion on revenue of $25.3 billion for the fiscal year ended June 30, 2001 – his first full year as CEO.

—Matthew Jarzemsky contributed to this article.

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