Pund-IT: Getting Things Right—Software and IBM’s Acquisition Strategy

Weekly Review Volume 7, Issue 37 September 14, 2011 In this issue: Getting Things Right—Software and IBM’s Acquisition Strategy By Charles King, Pund-IT, Inc. Pund-IT, Inc. Contact: Hayward, CA Office: 510-383-6767 U.S.A. 94541 Mobile: 510-909-0750 charles@pund-it.com www.pund-it.com

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 technolo-gy has evolved to deliver faster computation, greater storage and more seamless network-ing, the information generated and supported by those solutions has continually expandedin 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 maxim-izing the value of IT investments has increasingly become the province of software invest-ment 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 in FY2010) software sales contributed a mere $3.586B of that total. But HP software deliv- ers 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 acquisition, for which the company paid an eye-watering $10.3B, is meant to bolster HP’s “big data” solutions. But some of Apotheker’s plans, including discontinuing webOS development 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 consider the world’s largest enterprise software portfolio? How about “backing into” system vendor status by buying an ailing Sun Microsystems, then tying Sun’s hardware assets and 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 analytics appliances 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 2

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 success.In FY2010, IBM’s Software Group (SWG) delivered $22.5B of the company’s $99.9B in totalrevenues. But it did so while delivering pre-tax margins of 35.8%: more than twice that ofIBM’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 ofthis 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 overallmarket conditions.IBM’s Acquisition ModelHow have acquisitions benefitted the company? In three ways:1. Like many vendors, IBM has leveraged acquisitions to round out its solution portfolios, adding features that would have taken far longer to develop internally. This has allowed the company, for example, to deepen offerings designed for specific vertical industries 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 leveraged numerous deals to develop a clear leadership position. But it also applies globally, expanding IBM’s presence in dynamic emerging markets in Asia, Latin America and Eastern Europe.3. Finally, acquisitions have helped drive longer term IBM strategies like Smarter Planet and 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 services are used by banking, investment and insurance businesses including 25 of the world’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 re- quirements and improve business decision making across financial risk domains, including market, liquidity, credit, operational and insurance, as well as economic and regulatory capital. Integrated risk management certainly continues to be a challenge in the financial industry, particularly in light of the global financial crisis and mortgage meltdowns in numerous regions. As a result, Algorithmics will be a valuable addition to IBM’s solution portfolio for the financial industry. But the company’s expertise also reso- nates with IBM’s OpenPages acquisitions and should enhance the company’s Business Analytics 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 sec- tors, including banking, defense, health care, insurance, law enforcement, national se- 3

curity and retail, and its software solutions are currently used by 12 of the world’s top 20 retail banks and eight of the world’s ten largest companies. i2’s considerable market success would make the company an attractive asset for nearly any major vendor but IBM’s advanced data collection and warehousing technologies and its notable real-time analytics solutions make the two companies an especially good match. In addition, the exponential explosion of “big data” assets—information and intelligence collected from disparate, unstructured sources including social media, biometrics, digital video collection and criminal databases, will present a continuing, growing challenge for organizations involved in crime and fraud prevention. They will be a natural constituency for combined IBM/i2 solutions.Final ThoughtsAny study of acquisitions reveals a spotty record of success. Companies sometimes mistak-enly 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 literalhealth 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 onacquisitions 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 isany indicator of the future, we expect that many or even most of these deals will help drivecontinuing 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 thesechanges will have on business customers and the greater IT marketplace. Though Pund-IT provides con-sulting and other services to technology vendors, the opinions expressed in this commentary are thoseof the author alone. 4

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Pund-IT: Getting Things Right—Software and IBM’s Acquisition Strategy

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