IBM to buy Rational Software

IBM to buy Rational Software

IBM has agreed to acquire Rational Software for US$2.1 billion.

Rational provides software tools and services for developing business applications and other products, such as embedded software for cell phones, medical systems and other devices.

The acquisition will allow IBM to provide a software development environment for companies that want to integrate their business processes and software infrastructure across their operations, including suppliers and customers, the companies said.

Ninety-eight of the Fortune 100 companies, including IBM, already use Rational's tools, according to a joint statement.

IBM already offers close integration with a wide variety of Rational's software products. The IBM WebSphere tools, built on the company's Eclipse open-source platform, provide a single portal-like interface that gives software developers access to a wide range of tools from other software vendors, including those made by Rational.

Launched last year, the Eclipse project is managed by a consortium of vendors that includes Borland Software, Fujitsu Software, Red Hat and Sybase in addition to Rational.

"This will provide IBM with the end-to-end application development process integration that we hear customers telling us they want," said Steve Mills, IBM senior vice president and group executive of the Software Group.

"There's a shift in focus among medium and large size businesses to integrate horizontally, to create an on demand environment, to focus on process integration not function automation. They need tools that provide design capability, and a platform for integrating team development," Mills said.

Responding to news of the acquisition, Hewlett Packard (HP) said in a statement that it will continue to have a strong business relationship with Rational, including their joint activities as part of the industry group. HP said that it would continue to work with IBM/Rational and Microsoft and sees the future of application development in interoperability between the Java (J2EE) and Microsoft .Net platforms.

Industry experts said the acquisition does not come as a surprise.

"I think it's something we had somewhat expected in that there's been over the past year a movement to where you can see the providers of integrated development environments (IDEs) expanding their toolkits such that they become integrated lifecycle environments," said Thomas Murphy, senior program director at the Meta Group.

Whereas IDEs have been focused on providing tools for editing, compiling and debugging code, they increasingly need to support so-called "life-cycle management" functions such as modelling, testing and version control, Murphy said.

Once the acquisition is completed, IBM plans to sell Rational's application development software through the Rational sales force, which will incorporate into IBM's own sales team, the companies said. In addition, IBM intends to integrate Rational's products more tightly with its own software offerings, they said.

"IBM needed to be able to expand their platform. For Rational, all the people who used to be their partners were becoming less so. Microsoft is strengthening its own suite; Borland picked up a number of competitors; Oracle is building all this stuff. For Rational and IBM - both of them were driven this way," Murphy said.

And, with IBM's size and cash position and the downturn in the technology markets, Rational was an easy target for acquisition, Murphy said.

"When you look at the value, $2.1 billion is not a huge premium on where (Rational) is trading now. And obviously they're trading down a lot lower than where they used to be. But if you've got cash and a platform, those are the companies that are going out to make acquisitions. We've seen a bunch, and I think we may see more," Murphy said.

Rational will join other software purchases including Tivoli and Lotus as a new brand and new division of IBM's Software Group.

As with IBM's other purchases, Rational will retain its brand name. But IBM may look to move some of its other, complementary technologies under the Rational umbrella, according to Mills.

Rational co-founder and CEO Mike Devlin will serve as general manager of the division, reporting to IBM Senior Vice President and Software Group executive Steve Mills, IBM said.

There are no plans for layoffs of Rational workers and no plans to relocate workers at Rational's main development centres.

"Our plan is to invest in this business. Our approach to software business is to get the return by exploiting the broad channel that we have and growing the business," Sweeney said.

However, employees working in some of the company's smaller branch offices around the world may be consolidated with other IBM facilities in those areas, according to Sweeney.

IBM and Rational anticipate closing the deal in the first quarter of 2003, they said.

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