Getting Things Right—Software and IBM’s Acquisition Strategy

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Contact:Office: 510-383-6767Mobile: 510-909-0750charles@pund-it.comwww.pund-it.com

Pund-IT, Inc.Hayward, CAU.S.A. 94541

Weekly ReviewVolume 7, Issue 37September 14, 2011

In this issue:  Getting Things Right—Software

and IBM’s Acquisition StrategyBy Charles King, Pund-IT, Inc.

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Getting Things Right—Software and IBM’s AcquisitionStrategyBy Charles King, Pund-IT, Inc.

For decades, organizations have faced a challenging, elemental IT trend; even as technology has evolved to deliver faster computation, greater storage and more seamless network

ing, the information generated and supported by those solutions has continually expandein size and complexity.

How can vendors help customers deal with this conundrum? Some areas are largely thepurview of hardware development (computation—servers and CPUs, media capacity andread/write performance—storage, data access and transmission—networking). But maximizing the value of IT investments has increasingly become the province of software investment and development.

Software as a DifferentiatorNot surprisingly, software is a point of interest or focus for virtually every major IT compa

ny, but it has become absolutely crucial to systems vendors. How crucial? Consider this:

HP—While the company generates more revenues than any other vendor ($126B inFY2010) software sales contributed a mere $3.586B of that total. But HP software delivers higher operating profits (21.2% measured as a percentage of revenue) than any other company business unit. Last September, HP hired Leo Apotheker (formerly CEO of SAP) as its new CEO, signaling a shift towards building out its software business.Apotheker is doing what he was hired to do. For example, the recent Autonomy acquistion, for which the company paid an eye-watering $10.3B, is meant to bolster HP’s “bigdata” solutions. But some of Apotheker’s plans, including discontinuing webOS develoment and selling or spinning off the company’s signature PC business have left many

HP shareholders and partners cold. Oracle—What is the next step for a vendor that owns what many observers would con-

sider the world’s largest enterprise software portfolio? How about “backing into” systevendor status by buying an ailing Sun Microsystems, then tying Sun’s hardware assetsand its own applications together into “integrated solutions”? How is that working out?Pretty well, according to Oracle, at least so far as specialty data warehouse and analytiappliances go. But while the company focuses most of its attention on emerging “exa”opportunities, Sun’s share of the general purpose server and enterprise hardware markets continues to dwindle.

Where is IBM in this list? Actually, the company deserves a special place as it has becomean implicit model for HP, Oracle and some others’ software strategy evolution. Why wouldthat be the case? In large part, because IBM has been at it longer and more successfullythan any other major vendor.

Software + Acquisitions = SuccessSince Sam Palmisano became IBM’s CEO in 2002, a considerable portion of the company’s$6 billion annual research budget has been dedicated to software development. Softwarealso provides critical tools for sparking and differentiating the company’s industry-leading

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global services organization. But perhaps most importantly, IBM has executed over 120corporate acquisitions since 2002, more than 70 of which were software-related.

By almost any measure, these acquisitions have played a key role in IBM’s financial succesIn FY2010, IBM’s Software Group (SWG) delivered $22.5B of the company’s $99.9B in totarevenues. But it did so while delivering pre-tax margins of 35.8%: more than twice that of IBM’s Global Services organizations (GBS/GTS) and over four times the margins of the com

pany’s Systems and Technology Group (STG—servers and storage). The material results othis performance have been great for the company and its shareholders—in FY2010, IBMdelivered robust earnings per share (EPS) of $11.52, a stunning achievement given overalmarket conditions.

IBM’s Acquisition Model How have acquisitions benefitted the company? In three ways:

1. Like many vendors, IBM has leveraged acquisitions to round out its solution portfoliosadding features that would have taken far longer to develop internally. This has allowethe company, for example, to deepen offerings designed for specific vertical industrie

such as financial services.2. Acquisitions have also provided IBM the means to jump start efforts in new markets.

This is certainly the case in business analytics, an area where the company has lever-aged numerous deals to develop a clear leadership position. But it also applies globallyexpanding IBM’s presence in dynamic emerging markets in Asia, Latin America andEastern Europe.

3. Finally, acquisitions have helped drive longer term IBM strategies like Smarter Planetand high value market plays, including Information on Demand (IoD). Over time, ac-quired assets have been critical in the continuing evolution and ongoing success of these and other initiatives.

Case Studies: Algorithmics and i2IBM’s two most recent acquisitions provide valuable insights into how this strategy canwork.

Algorithmics—A risk analytics firm, Algorithmics’ software, content and advisory ser-vices are used by banking, investment and insurance businesses including 25 of theworld’s top 30 banks and more than two thirds of the CRO Forum of leading insurers.Those companies use Algorithmics’ solutions to help assess risk, address regulatory requirements and improve business decision making across financial risk domains, in-cluding market, liquidity, credit, operational and insurance, as well as economic andregulatory capital. Integrated risk management certainly continues to be a challenge inthe financial industry, particularly in light of the global financial crisis and mortgagemeltdowns in numerous regions. As a result, Algorithmics will be a valuable addition tIBM’s solution portfolio for the financial industry. But the company’s expertise also resnates with IBM’s OpenPages acquisitions and should enhance the company’s BusinessAnalytics and Optimization Practice.

i2—i2 provides intelligence analytics for crime and fraud prevention to over 4,500 customers in 150 countries. The company’s clients span multiple global industries and setors, including banking, defense, health care, insurance, law enforcement, national se-

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curity and retail, and its software solutions are currently used by 12 of the world’s top20 retail banks and eight of the world’s ten largest companies. i2’s considerable marksuccess would make the company an attractive asset for nearly any major vendor butIBM’s advanced data collection and warehousing technologies and its notable real-timeanalytics solutions make the two companies an especially good match. In addition, theexponential explosion of “big data” assets—information and intelligence collected fromdisparate, unstructured sources including social media, biometrics, digital video collec

tion and criminal databases, will present a continuing, growing challenge for organizations involved in crime and fraud prevention. They will be a natural constituency forcombined IBM/i2 solutions.

Final ThoughtsAny study of acquisitions reveals a spotty record of success. Companies sometimes mistaenly value the businesses they acquire or pay too much for assets that they are convincedthey want. Other times, an organization will take a flyer on a company headed irrevocablydownhill, mistaking its own capacity to successfully turn things around. All too often, aclash of corporate cultures can dooms deals and result in open wounds that risk the literahealth of the acquiring company.

IBM understands these risks intimately and has done well in avoiding problems that havetripped or crippled competitors by getting things right to begin with. This history of pastsuccesses is, in part, reflected in the company’s plans to spend an additional $20 billion oacquisitions between 2010 and 2015, envisioning these deals as an essential part of itsgrowth strategy. Given the central position software inhabits in IBM solutions, we expectthose technologies will be crucial elements in many of these acquisitions. And if the past any indicator of the future, we expect that many or even most of these deals will help drivcontinuing IBM success.

© 2011 Pund-IT, Inc. All rights reserved. 

About Pund-IT, Inc. Pund-IT emphasizes understanding technology and product evolution and interpreting the effects thechanges will have on business customers and the greater IT marketplace. Though Pund-IT provides cosulting and other services to technology vendors, the opinions expressed in this commentary are thosof the author alone.