|TBR's Commentary on IBM's Acquisition of SPSS & Ounce
Allan B. Krans, Senior Analyst, TBR
Sign of things to come
Sitting on an $11 billion pile of cash, and with the recession sapping organic growth from its high margin software business, it was only a matter of time before IBM returned to its consolidation of software companies. IBM's large organic base of software revenue is highly profitable, but is not geared to generating significant growth. Acquiring software companies over the last five years generated a majority of IBM's software growth, which in turn support its corporate wide margin expansion efforts.
IBM, like most technology companies, took a respite from acquisitions during late 2008 and early 2009, favoring to hold onto its cash as volatile valuations and uncertainty swirled around the weakening economy. However, with valuations and the economy seemingly stable, IBM is again focused on driving revenue and profitability growth through acquisitions once again. TBR expects the two purchases are a starting place, but that additional acquisitions of greater than $1 billion will be announced before the end of 2009.
Post-recession, the strategy remains the same
Following its pursuit of Sun, the purchases of SPSS and Ounce are a return to IBM's traditional software acquisition strategy. TBR believes that Sun was a unique opportunity, and that IBM is not actively seeking hardware companies or other mega-deals (>$5 billion) at this time. Most of IBM's acquisitions focus on small to midsized software companies that benefit from increased distribution capabilities and integrate closely with existing software assets. Taking this incremental approach to software purchases both lowers the risk and increases the financial benefits derived from investments in software acquisitions.
Moving Information Management into the Future
The acquisition of SPSS provides a capstone for IBM's Information On Demand Initiative. Starting with the base hardware, moving through core management, database and business intelligence offerings, IBM is providing all of the tools customers need to store, manage and utilize their data to meet business needs. IBM's Information On Demand portfolio has expanded along with customer sophistication over the past five years, starting at the base level of storage hardware and management features, and moving into more advanced methods of extracting value and actionable insights from data. The addition of Cognos provided cutting-edge tools for drawing conclusions regarding existing data, while the purchase of SPSS allows customers to look to the future, identifying trends in data that predict future events.
Value lies in the cross-sell
In addition to the strong fit with IBM's Information On Demand initiative, the purchase of SPSS also provides a number of business model and financial benefits. IBM's entire go to market approach involves delivering solutions to business problems, and the additional of SPSS broadens the company's ability to address a growing area of customer needs. The purchase may not deliver the scale of growth associated with acquiring a small software company such as Ounce, but it does open new discussions that can drive growth in multiple adjacent software and services segments.
Compared with the focused operations of smaller companies, SPSS is already globally distributed (United States accounted for 42% of 2008 revenue) and slow growing (4% revenue growth in 2008), but profitable (16% operating margin in 2008). In light of the Business Analytics and Optimization services that were announced earlier in 2009, TBR expects the SPSS portfolio to be bundled and cross-sold throughout IBM's organization to generate software revenue and services opportunities by leveraging the SPSS brand.
An Ounce of security prevention
The acquisition of Ounce may have been overshadowed by the larger purchase of SPSS, but it still represents an important investment for IBM. The purchase simultaneously supports multiple initiatives for IBM, including application development, embedded security, and cloud computing. For a purchase price TBR estimates is less than $50 million, IBM adds the ability to enhance security across its Rational portfolio and increase the security of applications, whether they are deployed traditionally or through the cloud.
The purchase also integrates complements the prior purchase of Watchfire, also a development security testing company. The difference between Watchfire and Ounce is that Watchfire tests the completed application, while Ounce tests the underlying code. The combination of approaches allows IBM to provide a holistic security solution allowing customers to ensure the security of developed applications.