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October 28, 2011
4 Min Read
100 Years Of IBM: 25 Historic Milestones
Slideshow: 100 Years Of IBM: 25 Historic Milestones (click image for larger view and for slideshow)
IBM, long known as a provider of foundational software that helps businesses run data centers and other back-end operations, is moving into the market for end-user applications under a strategy shift that significantly broadens the menu of companies it's eyeing for possible acquisition, according to a senior executive at the tech giant.
"I've got a long list of things I'm interested in," said Steve Mills, IBM's senior vice president for Software, in an exclusive interview Thursday at the company's headquarters in Armonk, NY.
For years, IBM balked at applications, mostly out of concern that participating in the market for software used directly by line-of-business workers for everything from sales forecasting to risk analysis would put it into competition with other industry players and partners to which it sells significant amounts of hardware, middleware, developer tools, and services.
But Mills acknowledged that the landscape has changed. Rollups by rivals like HP and, in particular Oracle, which in the last few years has snapped up a range of apps makers, including PeopleSoft, JD Edwards, Siebel, and, earlier this week, RightNow, means there are fewer independent application vendors for IBM to offend as it enters the market itself.
"If a partner ceases to be a partner, the money's gone," said Mills. "For every action there will be a reaction."
[ IBM's main software rival isn't sitting still. Read Oracle's Mark Hurd: We Know CIOs. ]
That's one reason why IBM is pushing into apps, and quasi-apps, with purchases like risk analysis specialist Algorithmics, and fraud prevention software developer i2--deals that were announced within the past two months. "They're absolutely application-like, and intentionally so," said Mills. Contrast that to 2003, when Mills told a group of journalists that "IBM is not in the applications business."
The other is that it already has a full portfolio of development tools and middleware, and needs to tap new markets for continued growth. Armonk's software unit, excluding currency gains, grew 5% last year and needs to find more outlets if it's to continue to add to its top line.
The shift opens a range of options, from B2B social media platforms to cloud-based services, Mills said. "As you look over a ten-year period, the portfolio has gotten wider and deeper and therefore that opens up more possibilities so additional things could be brought in that can be leveraged. As the portfolio expands, you say, here's another adjacent area, that maybe five years ago that wasn't very adjacent."
To be sure, with a public commitment to spend roughly $20 billion on acquisitions through 2015, IBM will be active. The big question is whether it will continue to build its portfolio through buyouts of small and mid-market players, or make a major move into the ERP and CRM domains through a megadeal with an industry giant like Germany's SAP, long thought to be a possible target for one of tech's major conglomerates.
Mills, unsurprisingly, did not address the question directly. But he conceded that the industry landscape has changed, thanks mostly to terraforming activities by Oracle, to the point where IBM might now consider deals it would have rejected in the past.
Indeed, the company previously might have shied away from a tie-up with SAP so as not to disrupt a $1 billion partnership it inked with PeopleSoft in 2004. But that ERP specialist is now part of rival Oracle. "Our partnership around SAP has expanded quite significantly" since Oracle acquired PeopleSoft for $10.3 billion in 2005, said Mills.
Last week, Oracle struck a deal for another IBM partner--cloud CRM provider RightNow, for $1.5 billion. That might have Mills and company eyeing RightNow rival Salesforce, which already offers extensions that tie in directly to IBM's Cognos analytics tools, and thus meets Mills' requirement that any acquisition "has to fit with what I have." Other cloud players include Workday, which this week announced $85 million in funding from JP Morgan, Amazon's Jeff Bezos, and other investors.
Mills said nothing to indicate that IBM is actively contemplating such moves (the price tag for SAP would likely be in the range of about $60 billion or more and so would require IBM, with $11.3 billion in cash and equivalents, to take on some leverage), but it does have a track record of turning deep partnerships into marriages. The most notable example is Cognos, with which it worked closely for years until buying it outright in 2008 for $5 billion.
The decision to pursue or forego major deals will ultimately be up to global sales head Ginni Rometty, who this week was tapped to become IBM's next CEO on Jan. 1, after Sam Palmisano steps down. A big acquisition would give her the chance to put her own stamp on Big Blue. What's certain: she's got billions of dollars to put in play. Mills will want a good chunk of that to continue the build out of his software group.
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