IBM differs in acquisition strategy

Like cyclist Lance Armstrong in the Pyrenees Mountains, IBM's acquisitions strategists have picked up the pace. Just last month the company added application-monitoring software from Cyanea Systems and business intelligence development tools from Alphablox to its nearly US$15 billion software division.

One reason is simply opportunity. IBM has loosened the purse strings, and some of the smaller companies have lowered their valuations so they can get bought, says Jasmine Noel, a partner at research firm Ptak, Noel & Associates.

Additionally, customers continue to gravitate toward large vendors, which puts pressure on small vendors to get acquired and translates into bargains for the big players.

"There are a lot of companies shopping themselves around very aggressively," says Jim Murphy, a senior analyst at AMR Research. "It's a buyers' market right now for IBM and other big vendors."

In IBM's case, the buildup of its services business (boosted significantly with the 2002 purchase of PricewaterhouseCoopers' consulting arm) is another reason for all the activity. IBM's services engagements provide a ripe setting for identifying acquisition targets in areas where IBM potentially could make money, Murphy says. "The services business is giving IBM some insight into areas of fruitful acquisition," he says. "IBM can see what its services customers need and evaluate whether the need is repeatable."

Trigo Technologies is a good example. IBM acquired Trigo for its product information management software in April. Trigo's software is used mainly by retailers and consumer goods companies, linking product-related information such as size and color with transaction terms such as pricing, and then publishing this information to internal and external systems.

IBM snapped up Trigo in time to catch the wave of mandates from retailers around data synchronization - an initiative to reconcile the product data that gets swapped among companies to reduce errors in invoicing, purchase orders and product delivery. Wal-Mart, Wegmans, Ace Hardware, Lowe's and The Home Depot are among retailers requiring their suppliers to begin synchronizing product information through UCCnet, a nonprofit organization that manages an item registry for companies' product data.

"IBM did a good job of assessing market opportunity with Trigo," Murphy says.

Keeping it small

IBM didn't disclose what it paid for any of its last five software company purchases. But in the first half of the year, Big Blue spent a total of US$800 million on acquisitions, according to its most recent quarterly financial statement. During that time, IBM closed the Trigo acquisition and its purchase of Candle, which makes mainframe systems management software.

In 2003, IBM spent US$1.8 billion on acquisitions, including the purchase of document management software maker Green Pasture Software. The Green Pasture deal is typical IBM, Murphy says. It wasn't a blockbuster, but it paves the way for IBM to help customers deal with document management challenges - including compliance with looming corporate governance legislation such as the Sarbanes-Oxley Act.

Whereas EMC paid US$1.7 billion for document management vendor Documentum in late 2003, that's not usually IBM's style, Murphy says. "Green Pasture wasn't a big-bang acquisition, so IBM didn't have to spend nearly as much," he says.

Nonetheless IBM picked up technology that's complementary to its own and already used by a number of IBM customers, he says. Additionally, by choosing a smaller vendor, IBM still is able to partner fairly effectively with larger content management players.

Likewise, IBM's two most recent deals, Cyanea and Alphablox, were of small companies that already partnered with IBM. "IBM has an advantage over a lot of other companies when it comes to acquisitions, because it has such a strong ecosystem of partners," Murphy says. "It can test the waters through those partnerships pretty effectively."

The Cyanea purchase extends IBM's application problem management and resolution capabilities, says Rich Ptak, partner at Ptak, Noel & Associates. "Combined with Tivoli and Candle technologies, it will allow IBM to ship an end-to-end solution for application/transaction monitoring, problem detection and diagnostics, and [eventually] a problem resolution solution that functions in both the mainframe and distributed environments," he says.

The biggest challenge will be creating a single, integrated package, Ptak says. IBM has assembled all the pieces needed for management, monitoring, detection, diagnostics and repair, he says. Now "the pieces need to be assembled and shipped in an integrated whole," he says.

Market time

Integration is an issue in any technology acquisition. How quickly IBM's acquired technology gets assimilated varies. Sometimes it's fast: The same month that IBM announced it was buying Green Pasture, it provided details about its new DB2 Document Manager product based on Green Pasture technology.

In cases when IBM is buying one of its partners, API-level integration often is already available. Beyond that, IBM isn't always motivated to completely integrate acquired technology overnight, Murphy says. The priority is to get the products working together and beef up that integration over time. Keeping the products distinct for a time means IBM can charge for them separately, he says.

Looking ahead, Ptak suggests IBM could benefit from buying network device management technology.

Tools for mapping infrastructure relationships at the service level is another gap to be filled, Noel says. "Cyanea can do some of that, but only for [Java 2 Platform Enterprise Edition] platforms - and enterprises have a lot more than just J2EE," she says. Likely acquisition targets are Collation and Troux Technologies, Noel says.

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