IBM Eye

Cicso used to be held up as the best example of a company that was “good” at making acquisitions. There are a lot of things that can go wrong, particularly in the software & services fields where the people are the real asset being acquired. Picking the right target, making sure that the company is more valuable with you than without you, and making sure that things don’t disintegrate after you get them are all tough. Robert Holthausen, who teaches courses on M&A strategy at Wharton was quoted as saying that there have been “hundreds of studies” conducted on the long-term results of mergers and notes that researchers estimate the range for failure is between 50% and 80%. I found a neat blog post holding up IBM as just such a model.

IBM and the Art of Acquisitions from Massachusetts based Xconomy, writes:

It’s a balancing act, but one IBM seems to have mastered, says Mike Weider, founder and CTO of Watchfire, a security company that joined IBM last year. “If you integrate too quickly you smother the fire that made [the acquired company] special,” Weider says. “But if you don’t integrate fast enough then you don’t leverage the synergies. I think IBM has figured out a nice balance between those two things.”

I found the article a nice read, though perhaps a bit slanted toward IBM (though the author maintains that IBM has a particular talent at this so it stands to reason that the article is flattering). Anyhow, my opinion has been that IBM has been growing a little bit too quickly and needed to chew a little more before moving on but maybe I’m off track.

Another quote I found interesting:

But synergies between products don’t mean much if the people who actually make them aren’t happy. So IBM says it puts a lot of thought into the human side of the acquisition equation. “You are acquiring the people—that is the asset in most of these cases,” says Hebner. “The code base, without the people who understand what it does, is not very useful. So we’ve put a much bigger emphasis making sure that the people are happy. We do a lot to make sure that we celebrate the culture of the company coming in. We actually try to assimilate things from them—and IBM has become a much more flexible place because of all these new people.”

I guess I only hear the squeaky wheels, but the feel I get is that in the US, morale is dangerously low. Perhaps that’s not the case in newly acquired divisions… I can’t tell that from my seat. Anyway, it’s worth 5 or 10 minutes.

There has been talk in a few circles about IBM continuing to acquire security firms. I don’t know very much about this side of the business. I know that it’s a huge source of consulting revenue and an essential component in virtually every contract they bid. That said, I sure hope IBM doesn’t overpay for a stronger foothold into the market. I was a little disappointed that IBM bought Cognos, but I\’m not sure they had any choice. $5B was a tough pill to swallow though. I saw a blog post (seemingly by someone hoping to profit from the sale) about an Israeli company called Check Point.

Until now, the thought on the Street was that Check Point was going to continue as a stand-alone company, but with IBM on the prowl, it may be too much for CEO Gil Schwed to resist. Check Point currently trades at a market cap of $5.53 billion, and an acquisition would certainly come with a much higher price tag. Based on valuation, it would take between $7-8 billion to buy the company. For deep-pocketed IBM, that’s not too high a price. For Schwed, a takeover at that price would be tough to reject, and it would break all records for M&A of an Israeli company.

I think IBM has done a pretty decent job of balancing new acquisitions, integrating past acquisitions and organic top line growth over the past few years. Cognos will likely stretch and test that record because of the sheer size of the pill. The security firms rumored include Check Point, McAfee, Websense and SonicWALL. Websense and sonicwall are $900M and $450M respectively, and IBM has bought firms of that size with alacrity while avoiding investor rumblings. McAfee and Websense are north of $5B, making for (potentially) the largest ever target for big blue. I’m not sure that the time is right for throwing around such coin. Most acquisitions only enrich the acquired and hardly ever benefit the customer. Just slow down IBM. Digest for a little while.

I think this article says it best:

“On paper it makes sense. AMD needs IBM’s expertise,” Cohen said. “That said, I can’t imagine IBM, having exited many parts of this (chip) business, putting in the investment that would be required to catch up with Intel.” Among other things, IBM doesn’t want to alienate Intel, a longtime chip partner.

This just isn’t the direction IBM is wanting to go. They’ve spend a decade building their business around high-margin services and software — it wouldn’t make sense to deviate from that, even if it’s a good deal.

There’s been talk about this sale for years. I personally didn’t really think it was going to happen until all the consolidation in the BI space this past year. Cognos was the big dog, a long-time IBM partner, and I think IBM needed to pick them up if only to keep others from buying them and shutting IBM out of the space. This is IBM largest ever acquisition, though I bet an inflation adjusted $3.5 Billion for Lotus in 1995 would edge it out. Anyhow, I think this is a play IBM had to make and had to overpay (though not as much as with ISS and others last year) to keep others out. I don’t know how to put a price tag on defensive postitioning, but you really can’t fault IBM for this move.

Marketwatch has a news story on the purchase here.

I’ve been pondering for sometime about a future hookup of IBM and Cognos. Motley Fool talked about it maybe six months ago and IBM’s appetite seemed insatiable around that time. This announcement (IBM to use Cognos as its embedded workforce performance reporting and analysis engine) makes that more likely I suppose. There are only three BI players out there and Hyperion was snapped up by Oracle earlier this week. And then there were two. IBM doesn’t really have a relationship with Business Objects and they are increasingly wed to Cognos and BI is increasingly important (at least in the eyes of tech buyers). I’ve looked at IBM’s acquisitions over the past months, and they are all companies that IBM knew well from these sorts of partnerships. But, they also were all (excepting ISS $ Filenet) on the small side, giving IBM the beer-goggled belief that they could add value through the purchase with their legion of sales folks and solid reputation. (I ought to disclose that I am of the opinion that most acquisitions are the result of upper management sitting around in some meeting trying to come up with something clever to do to look productive. The other acquisitions happen because someone lost a bet I guess.)

Now Cognos would be hard for IBM to swallow - a current market cap of $3.5+ Billion - is about what Lotus and PWC’s Monday consulting arm were and IBM has such great momentum right now it would be unwise to risk a Lotus-type organizational shift simply to block other suitors. But… the market seems to be expecting someone to come in and gobble them up. But… the timing just doesn’t feel right for it to be IBM. IBM has a great game plan that’s just starting to yield fruit and the risk reward of that addition likely isn’t worth it right now.

Cognos is interesting though, because there is so little overlap with IBM and because their BI technology is so good (correct me if I’m wrong there… I’m a user rather than a developer). They practically invented the concept and are trusted in the marketplace and taught in business schools. Consolidation is happening so fast and IBM management has received only accolades from the recent binge.

So I don’t know. As I close my wishy-washiest post of all time, any thoughts from readers on the acquisition would be appreciated.

IBM announced on Saturday an agreement to acquire Softek Storage Solutions Corporation, a privately held company based in Vienna, Virginia. They have been an IBM partner for as long as they’ve been independent from Fujitsu (1996) and have good penetration in the Fortune 1000, claiming 60% of them as customers. Interestingly, Softek just bought Enigma Data Solutions, a mainframe software developer, in November.

Softek helps companies manage data, assisting with data uptime management, transferring data from one environment to another, as well as assisting with backup recovery plans for businesses. IBM has installed Softek’s flagship TDMF product “on thousands of services engagements worldwide” making it a decent idea for IBM to dip at both ends of that pond. Per Hoovers:

The company’s products are used to monitor, provision, and manage enterprise storage assets (including servers, mainframes, and networked storage devices). Softek also offers software for implementing storage area networks (SANs), monitoring service levels, and backing up and recovering data, as well as professional services such as consulting and data migration.

Financial terms were not disclosed and I haven’t caught and online whispers, but I would guess the acquisition to be in the . The acquisition is subject to regulatory approvals and other customary closing conditions. Upon completion of the agreement, Softek will become part of the Storage and Data Services business unit in IBM Global Technology Services.

IBM bought privately held Consul last week beefing up an already beefy Tivoli line with better security audit capabilities. Consul has worked with IBM for some time (see the case study on consul’s website here) so IBM must have liked what they saw. A couple things that I found interesting:

Per Computer Business Review:

This is not simply just another partner deal. While Consul has long offered RACF-based products, the real driver for the deal is recently developed, patent pending technology that correlates user access patterns from the cryptic logs maintained by various access control subsystems.

Once the deal is consummated, the Consul offerings would fill a major gap in Tivoli’s access management portfolio. Today, Tivoli Access Management can provision user privileges on a centralized basis. And thanks to this year’s acquisition of Micromuse, Tivoli has a network event correlation engine. But until now, Tivoli had no way of correlating user access patterns, or correlating user access with system events.

IBM has continued fleshing out Tivoli with its fat wallet, purchasing Vallent Corporation, a privately held company that makes software allowing Cell Phone providers to granularly monitor its network quality for a purported $200 million. Consolidation has been happening fast in the OSS space and it looks like convergence is playing out such that there will be half a dozen or so major players in a year or two:

• Amdocs
• HP
• IBM
• Oracle
• Telcordia

Smaller, independent players such as Vallent and Intec ripe for being brought into the fold of a larger company. So far this year, Oracle has bought MetaSolv, Amdocs - Cramer, CA - Wily and Syndesis picked up CoManage.) And Telcordia, who I described above as a survivor, is rumored to be for sale and in talks with SAP.

Anyhow, with the merger, IBM becomes the leader in quality of service tools for the wireless side of the telecom industry. Vallent Corporation specializes in wireless network and service performance management to help mobile operators forestall network outages and gauge the real-time quality of service being experienced by customers connected to their networks. Network failures are costly from a lost revenue and customer dissatisfaction standpoint so the QoS tools Vallent sells are indespensible. Vallent was formed by the mergers of Watchmark, Comnitel and Metica and, as such, nearly every carrier in the world uses their products. The private company is thought to have annual revenues of aroung $70 million with a sales price of $200 million.

Most notably, the Vallent acquisition will enhance IBM’s partnership network by adding many deep relationships with big names around the world the world. Per telecom industry pub Light Reading:

The move will bolster IBM’s position as one of the OSS industry’s biggest players, as Vallent, which has more than 200 mobile operator customers, will give the IT giant a wealth of wireless carrier contracts and wireless service assurance capabilities.

This seems like a great acquisition (Don’t they all? What’s a couple hundred million to us?). As they have demonstrated with contracts with Telstra Corporation and Bharti Airtel, IBM seems to be one of the few players with whom companies feel comfortable inking major dollar, many year deals. IBM gets a major arrow in its quiver with the QoS tools and the added (primary?) benefit of a huge rolodex ripe for the upsell.

IBM released earnings today.

Per Forbes:

IBM has purchased 50 companies, 31 of which are software firms and 48 of which are at least software related, in the past four years.

The rain cloud in this sunny forecast is that the growth came mostly from hardware and software top and bottom line growth. To really grow, IBM needs their services division to be sailing along at that clip. Services grew at 2-3% depending on your math. That’s better than flat but that’s IBM’s lever.

IBM has purchased Internet Security Systems Inc. (ISSX), an IBM partner since 1999, for $1.3 Billion.  ISS started in 1994 with one product, Internet Scanner, and has grown to a suite of security offerings including the ISS X-Force Intelligence Service credited with discovering a number of Microsoft security vulnerabilities in recent months.  This is IBM’s forth acquisition this month, and its 5th largest of all time, but hey, who’s counting.

Kristof Kloeckner, vice president of strategy and technology for IBM’s software group, was interviewed about the purchase by the Washington Post. 

He said, “We have enough freedom to do whatever is required to strengthen our business. We do not feel constrained”.  I think in this case someone should have constrained him.

From where I sit here in the cheap seats, it looks as though IBM has made its first bad acquisition of the year.  (more…)