IBM Paying $2.1B In Cash For Rational Software

Rational's software-development and -testing tools and 3,400 employees would form a fifth division within IBM's $5 billion software group.
IBM is buying Rational Software for $2.1 billion in cash. It's possibly IBM's largest buyout since it picked up Lotus Notes for $3.5 billion in 1995. Rational's software-development and -testing tools and 3,400 employees would form a fifth division within IBM's $5 billion-a-year software group, joining DB2, Lotus, Tivoli, and WebSphere. IBM plans to complete the transaction by March.

According to IBM, the Rational acquisition would support its computing-on-demand strategy, which emphasizes building--or at least outsourcing--IT environments that can adapt to changes in business processes and workload demands. The move would let IBM "focus on end-to-end application development and process integration that we hear customers telling us they want," says Steve Mills, VP and group executive of the software group, adding that businesses want to integrate horizontally with customers and suppliers. To do this, IT departments need to have a "strong build environment," he says.

IBM plans to retain the Rational name for the company's design tools, testing software, and collaborative application-development products. Rational CEO Michael Devlin would become general manager of IBM's new Rational division and report to Mills.

IBM's on-demand marketing strategy requires that it deliver a fair amount of application integration, something that Rational's products make easier to do, says software industry analyst Amy Wohl, president of Wohl Associates. "This is an excellent acquisition for IBM because they have had a long relationship working with Rational, and there's little overlap between what each company does."

With the full strength of IBM behind it, Rational might be able to grab more of the application-development market than it could on its own. International Data Corp. says that market will grow from $9 billion this year to $15 billion in 2006. Rational reported a net loss of $19.4 million for the quarter ended Sept. 30 on $154.5 million in revenue.

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