IBM builds up software war chest

IBM builds up software war chest

IBM started off the year by announcing three acquisitions in a span of five weeks. Industry watchers expect it to use the technology and expertise gained to deliver software with more comprehensive vertical industry focus, along with services designed to appeal to a range of companies, including small and midsize businesses.

Looking ahead, analysts expect IBM customers to benefit from faster, more automated data correlation, analysis and presentation technologies, along with policy management tools that adapt to IT changes.

So far, IBM is off to a good start if it is to maintain the acquisition pace it set in 2004, when it spent more than $US2 billion to make 14 acquisitions, all in software and services. In the fourth quarter alone, it finalised the acquisition of Danish company AP Moller's IT services business, along with six other smaller purchases.

Analysts suggest IBM will keep up or accelerate that pace, fuelled by many factors.

Corporate buyers were looking for more complete, less best-of-breed systems, which encourages the bulking up of already broad IT providers like IBM, a principal at Ptak, Noel & Associates, Rich Ptak, said.

Pent-up demand for IT products, a favourable economy, and the availability of small, reasonably priced companies were adding to the deal-making frenzy, he said.

Acquisition strategy

In keeping with IBM's typical formula, the latest deals are not blockbusters, but rather small, targeted purchases aimed at filling out the company's software and services businesses.

Large deals are not unheard of for IBM - its acquisitions of PwC Consulting and Rational Software in 2002 tipped the scales at $US3.5 billion and $US2.1 billion, respectively. But lately, IBM has focused on executing smaller, more strategic deals that can help fine-tune its strategy, according to principal at Enterprise Applications Consulting, Joshua Greenbaum.

"IBM has done the big construction. Now it's going in and adding the doorknobs and picking the interior paint colours," he said.

Ptak said it made sense for IBM to target vendors at can be acquired at reasonable or bargain prices and quickly return value to the company.

"IBM is avoiding the burden of overvalued and overpriced mid-tier companies with an inflated sense of themselves and their net worth," he said.

"There are a number of companies with the potential to complement IBM's offerings, but these won't be acquired because they have priced themselves out of the acquisition market."

Most recently, IBM announced plans to acquire outsourcing services provider Equitant for an undisclosed amount. Equitant specialises in handling companies' financial processes related to order management, such as order capture, credit management, billing and collections.

In the big picture, Equitant's finance and administration services are expected to help IBM capitalise on the market for what it calls "business performance transformation services" - a combination of software, consulting expertise and engineering assistance to help companies make over key processes.

IBM CEO, Sam Palmisano, said last year that such services represented a $US500 billion market opportunity, over and above the $US1.2 trillion that companies worldwide spend on IT products and services each year. In 2004, IBM took in $US3 billion in business performance transformation services revenue - a 45 per cent gain over 2003 revenue, according to IBM CFO, Mark Loughridge.

The Equitant news followed announcements in January that IBM will acquire application service provider Corio for $US182 million, as well as SRD, which makes identity-resolution software, for an undisclosed price.

Corio provides businesses with pay-as-you-go access to applications from vendors such as Ariba, E.piphany, Oracle, SAP and Siebel Systems. Its experience delivering application services to SMBs, and its ability to quickly provision and deploy applications, were what made Corio attractive to IBM, analysts said.

SRD brings a niche technology that can help fill out IBM's information management business. Its software is designed to help companies discover non-obvious relationships among their customers - such as demonstrating obscure links between people who could be in cahoots, or discovering that two or more individuals thought to be separate people are in fact the same person.

Buying customers

The technology could help enhance IBM's presence in markets such as manufacturing, banking, insurance, retail, healthcare, telecommunications and the government, a senior analyst at Current Analysis, Robert Lerner, said.

In some cases, IBM's buyouts go hand in hand with big services contracts. In tandem with the December news that IBM will acquire procurement services company KeyMRO from its three shareholders, IBM announced a seven-year deal to provide procurement services to the three sellers: Schneider Electric; specialty chemicals company, Rhodia; and media and entertainment services provider, Thomson.

Likewise, IBM plans to use its acquisition of Liberty Insurance Services (LIS), announced in November, to create a subsidiary to handle life insurance and annuity processing, and administration for insurance companies - including LIS parent, RBC Insurance.

Increasing vertical expertise is often a driver. IBM's acquisition of Danish IT services firms Maersk Data and DMdata - and coinciding consulting and IT services deals with sellers AP Moller and Danske Bank - have increased IBM's ability to serve clients in the transportation and logistics industry, Loughridge said in January.

Looking ahead, IBM would continue to concentrate its acquisition efforts on technologies that complement its current capabilities, Ptak said. He expected IBM to go after more automated policy management and maintenance tools that can adjust to changing IT conditions.

Technology for correlating data and events, as well as technology aimed at addressing compliance-related security issues, also were ripe for IBM buyouts, Ptak said.

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