Big Blue looks yonder

IBM spent nearly US$4 billion acquiring firms during the summer months. But, as Deborah Magid, director of strategic alliances, claims, it is part of an ongoing plan

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By  Published  October 6, 2006

IBM snapped up four software firms during August and spent over US$3.64 billion in the process.

The shopping spree included spending US$1.6 billion for content management software maker FileNet, US$1.3 billion on network security firm Internet Security Systems (ISS), US$740million for asset management software provider MRO Software, as well as the purchase of privately held service-oriented architecture (SOA) vendor Webify Solutions for an undisclosed amount.

Despite IBM executives claiming there was nothing out of the ordinary in its August activities, even for Big Blue it was a pretty exceptional month.

The FileNet purchase was IBM's largest deal in three years and the fourth largest in the company's history, with ISS close on its heals. And the US$3.64 billion spent on just four firms in one month completely dwarfed the US$2 billion IBM spent on 16 acquisitions during the whole of last year.

Perhaps there was nothing out of the ordinary in the spending spree and it was "just a coincidence", as Deborah Magid, IBM Software Group Strategy director of strategic alliances, tells IT Weekly. But, as Magid also says, "opportunities present themselves and we have to act".

It is not hard to understand why IBM did not feel it could afford to miss the opportunity to purchase the likes of FileNet and ISS when they became available. The software business is a very profitable one and companies like these can make IBM a lot of money.

Big Blue's own software division accounts for about a sixth of its revenue, but around a third of the company's profits, according to Magid.

In IBM's second fiscal quarter of 2006 just over 19% of the firm?s US$21.9 billion in revenues came from the software division.

It was the only one of its businesses to deliver sales growth compared to the same period last year — up 5%.

CEO Sam Palmisano is well aware of the importance a firm's software business can have on its bottom line and has overseen the purchase of 32 software firms in just three years will in charge at IBM.

"Our performance was led by our software business' and is a significant part of our integrated portfolio," Palmisano said in a statement reporting Q2 financial results. Taking these figures into account, it does not look as though IBM, or any other vendor for that matter, will be slowing down in their pursuit of software firms to add to their portfolio — and their coffers.

So with this in mind, IT Weekly speaks to Magid about IBM's acquisition strategy to find out what technology Big Blue hopes to gain out of August's acquisitions, how it is going to integrate this with its current software offerings, and whether it will be making any more big money buys before the end of the year.

Why has IBM bought so many software firms in such a short period of time?

Our strategy has actually been for quite some time now to augment our business in high growth areas, either to get a jump in emerging markets or to fill portfolio gaps.

We have been on a pace of doing acquisitions roughly one a month over the last few years, although I know there were a lot of them that clustered in the summer.

The pace is going to continue, but doing that much in one month, I think that was just a coincidence. However, opportunities present themselves and we have to act.

Can we expect to see any more big acquisitions from IBM in the next month or so?

There are always more acquisitions on the way in order to keep the pace we've been at. I don't know what size they will be or when they will close, but we will certainly be doing more.

How long had IBM been looking at the various companies that it recently acquired before deciding to jump in?

It varies from company to company. The truth is I don't know enough about how the ISS acquisition got done to be able to answer that, but I know in the case of Webify, for example, it had been a business partner for quite some time. IBM tends to acquire companies with whom we have some experience in the field.

We don't just go in and say, 'oh what an interesting compan' and just go buy it. We always buy companies with whom we have some experience.

Otherwise you can't really do the integration properly.

You don't know what their reputation is, you don't know their customers: the technical integration won't necessarily be simple and straightforward enough. We made some announcements this month about the Tivoli Provisioning Manager (TPM). TPM came out of the Rembo acquisition that was in May and we were able to bring the next set of products to market in around four months.

You couldn't do that if you didn't know the company.

Taking the acquisitions as a whole, what are they going to do for IBM's software division?

There's actually been a very interesting trend in the last couple of years towards a blurring of the boundaries between software and services.

A lot of the acquisitions we have done lately have sort of crossed those lines and, in fact, in the case of Webify, and especially in the case of ISS, the acquisitions were worked jointly by IGS [IBM Global Services] and by the software business.

In the case of ISS the assets are going to both places so the software assets are going to Tivoli, but ISS will be a business unit within Global Services and it bridges both of those areas.

What do the acquisitions say about IBM's approach to its software division and its importance to the company?

You can see that the bulk of acquisitions historically have been done by the software division.

The software business is responsible for around 16% of IBM's revenue, its our most profitable business, so its responsible actually for around a third of our profits.

It is a very high growth area for us and in the industry. I think an ability that IBM has to take a business-oriented view to technology and to use our software assets to do that has given good growth in the market for our customers and is also driving a lot of the acquisitions.

If you look at the kinds of acquisitions we have been doing, some of them are technology acquisitions, but they are always put together with business processes or with part of the services business, or initiatives like information on demand.

Those kind of things are an important aspect of the software business, rather than just thinking about it as packaged software.

Out of the four acquisitions, which one is going to have the biggest impact on IBM?

I don't know which is going to have the biggest, but I think ISS is certainly going to have a huge impact because security is a really important area for customers right now.

In the industry, managed security services are growing at 10% or more and are expected to grow even further.

It is an area where customers have been at the same time eager to buy something and reluctant to buy something.

They're fearful of doing the wrong thing so they don't always put their money down and buy a solution straight away. They are also fearful of outsourcing things because they don't like to lose control, and yet they need to.

They need to further automate what they're doing. They need to have a trusted third party to do these things and IBM has had a managed security services business for over 10 years.

ISS of course has very trusted brands in the market place and deep expertise both in services, in the guys who are writing the software and in their sales force.

They have a really incredible sales force that is all over the world. If you put that together with our business, it's really huge.

Do you think this area was somewhere where IBM was maybe lacking or needed beefing up?

It needed beefing up and I think that is partly a market statement. You can see how important security is now for customers and it has partly been driven by the amount of criminal activity that has been going on.

The internet, while a wonderful enabler of new kinds of business and new kinds of business processes, opens the doors for criminals. This is something that we all have to step up to and ISS lets us take a bigger role in stepping up to it.

Is there any technology IBM is acquiring in any of the acquisitions that is going to be particularly important in the coming years?

One of the things that has become important for our business and for the industry is the ability to further automate what we do.

There are not enough people in the world to do everything that has to be done in IT.

I gave you the example of the Rembo acquisition being wrapped into the Tivoli provisioning product. Just being able to manage and automate software solutions over thousands of devices, laptops, desktops and servers in an organisation and to do that in a very automated way is a really key capability and you will find that theme of automation through quite a bit of what we do.

It is true in ISS too. ISS automates some of the tasks of managing internet security as well. What is IBM planning to do with the X-Force Security Intelligence Service that it has acquired?

We have had an interesting set of white hat hackers and resear- chers inside of IBM for quite some time and the X-Force group, I think, will remain part of Global Services within this ISS division. They will work together with the people we've had on hand to do research into hacking and so forth. It is a really valuable asset.

Who are IBM's biggest rivals in the software space and how will the acquisitions IBM has made over the last month help it compete against them?

Our rivals are different in different spaces. I guess one of our biggest rivals has tended to be Oracle and their approach to acquisitions is very different from ours.

I think the thing that helps us with our acquisitions is partly the way we source them and integrate them, and partly the way we think about business and technology.

We tend to look for innovation wherever we can find it. So we look in our own research laps, we look at things that venture capitalists are funding; we look at companies who are business partners of ours. So when we need to fill a portfolio gap or get into a market quickly we are very open to the kinds of innovation we might bring into the company.

We've bought little, tiny companies from overseas and we've bought really big companies.

So we buy companies of all sizes because we're looking for that special thing that somebody else developed.

How is IBM going to address the overlap in FileNet and IBM technologies?

There is some overlap and there was some overlap when we bought Informix several years ago. FileNet was a funny player in the market place because we competed with them on a lot of deals, but we were also cooperating with them on certain deals too.

So the principle that I mentioned about knowing the companies that we buy, that was true even in the case of FileNet, which was sometimes a competitor. We had experience working with them.

We knew them really well, we knew that EMC had a big market share and this was a case of needing to be stronger in a particular market and so we bought FileNet to be stronger in that market and we?re putting the assets together with what we have.

In buying ISS, did IBM do it more for what it could do for the company in the managed security services space rather than the network security space?

It was really a combination of things. I guess you could ask yourself, would we have bought the company if it didn't have the software assets, maybe, I don't know.

But I mentioned before that this blending together of software assets and services business is actually really important to us. If you think about it, a lot of this is taking processes that were very people-intensive in the past and automating those processes. You can only automate those processes, you can only take labour out of the services business, if you are using software assets to do it.

Is there anything else that you would say is important about these acquisitions?

I would like to re-emphasise that we think about mergers and acquisitions in terms of capturing innovation for our growth businesses. We look for companies who are part of our partner network, the partner network is very important to us.

Sometimes when we form relationships with these companies and at the start we don't know they are going to be acquisition targets two or three years down the road, because the market changes, because our needs and the customers' needs change.

We are very focused on integrating both the technical and business aspects of the company. We want to get good value out of the acquisitions as fast as we can and we are very focused on doing that. It is also very important to think about the people in the acquisitions. When you are buying these assets, what are the assets you are buying?

As part of the acquisition you want these people to be part of what you do.

And so people have to be treated well, they have to know who they are going to report to, they need desks, badges, and all the things people need in an organisation. And years after these products are a distant memory you will still have those people and those great skills as part of your organisation.

"We don't just go in and say, 'oh what an interesting company' and just go buy it. We always buy companies with whom we have some experience. Otherwise you can't really do the integration properly."

"We?ve bought little, tiny companies from overseas and we've bought really big companies. We buy companies of all sizes because we're looking for that special thing that somebody else developed."

IBM's software buys

While IBM has clearly stepped up its activities in the software market with its recent spending spree, software has always been important to Big Blue.

Indeed, before Microsoft's rise to pre-eminence in the past decade or so, IBM was the world's largest software maker — it is still second only to the Redmond firm. And acquisitions have always formed a key plank in its software strategy: here are some of the other big software purchases it has made.

1995 — Lotus Development Corporation (renamed Lotus Software after acquisition). US$3.5billion. IBM bought Lotus to get a foothold in the groupware market with its Lotus Notes product.

2002 — Rational Software. US$2.1billion. Gave IBM a broader product range for its on-demand computing strategy, with Rational providing products and services for enterprise application development.

2005 — Ascential Software Corporation. US$1.1billion. By adding Ascential to its portfolio, IBM managed to both strengthen its data integration offerings and round off some unfinished business — Ascential had been created as a spin-off when IBM bought Informix for a similar sum in 2001.

Deborah Magid, Director, strategic alliances, IBM venture capital group

Deborah Magid (pictured above, right) represents the software business in IBM's Venture Capital Group. Magid is responsible for building ecosystems for IBM by sharing insights about emerging markets, technologies, and business models with venture firms and entrepreneurs.

Magid is a frequent spokesperson on topics of relevance to entrepreneurs and investors, and is on the board of SDForum, the Silicon Valley emerging technology network.

Previously in IBM, Magid managed the portfolio for the global small business group, was a program director for the WebSphere business, led a Java product development department, and launched the Developer Domains on

Magid came to IBM through the Taligent subsidiary, where she directed the human interface design organisation, led product marketing, and ran the corporate web site.

Previously, she held positions in product management, marketing, and user-centered design at GE Information Services and at AT&T.

Magid holds degrees in cognitive Psychology from the University of Pennsylvania and the University of Connecticut.

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