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EVA Analysis - Research Paper Example

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IBM and Economic Value Added (EVA) Name: University: Introduction IBM is one of the most successful firms in the world. IBM (International Business Machine) was among the pioneers in the information technology sector and became very famous for its desktop computers as well as server computers…
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Download file to see previous pages However, as IBM has faced competition in the computer hardware subsectror of the IT sector, it has diversified into other areas and become a big product in these areas. IBM has become more active today in the software sector as well as the cloud computing sector. In fact the area where the firm is most successful is the software sub-sector. IBM now has four main divisions which include Financing, Hardware, Services, and Software (Lines & Ambler, 2012). Each of the four departments in IBM has different profitability and this means that if the investors were to value each individually rather than valuing the firm one whole, they would have different a value in total. Economic Value Added (EVA) is the method of determining the value of a firm through calculating its value produced after return of capital invested and the cost of operation (Grant, 2003). Because of this when investors value each individual division as opposed to averaging the profits of each division and calculating the value firm of collectively, they would at a different value of the firm. In this regard, if investors were to demarcate IBM and each division valued individually, each of the division would have a different value and if these values were to be added together, they would have a higher value than the value calculated in a combination. Rationale Every firm intends to get the best and highest valuation, just like they want to make the highest profits. This is why it is necessary for a firm to find the best way to improve its value. The value of an organization can also be theoretical. One theoretical method of a valuing a firm is the EVA method and has been used in several firms. Warren Buffet showed that investors value a firm differently if the firm has different divisions with different values. By separating the less valuable parts of the business from the more valuable parts of the firm, it is possible to help the investors in a different light (Grant, 2003). Eliminating the negative aspect of the firm By separating the firm into different units, the investors are able to see the firm in a better light because the negative aspects of the firm can be separated from the firm. Warren Buffet used this in Coca Cola and separated the less profitable division from the rest of the firm. This led to the investors to be willing to value the firm higher. As a result, separating the firm into units and carrying out an EVA evaluation is not just an accounting process but also a psychological process, which help in lifting away the negative aspects of the firm. In this regard, it is necessary for a firm like IBM to separate the less effective aspects of the firm to let the investors to see the better aspect of the firm. This approach is more useful to IBM than almost any other firm because of the history of the firm. As already discussed, IBM was the leader in hardware manufacturing, both for retail and corporate customers. However, as new players came into the market, it became harder for the firm to deal with the competition, it has to diversify. In the modern day, IBM is no longer the giant it was in the hardware sector, but competitors such as HP and Dell have shrouded the firm. However, IBM is doing so well in its software division and it has become a leader in this new niche. However, it is very hard for investors to see this new opportunity unless and until IBM separates itself from the older IBM and to the new IBM. Until the ...Download file to see next pagesRead More
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