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IBM To Acquire Corio For $182 Million

The move will expand IBM's presence in the market for hosted software.
IBM will purchase application service provider Corio Inc. with an eye to enhancing its presence in the hosted software market, the company said Tuesday. Under the deal, IBM will pay $182 million in cash, or $2.82 per share, to Corio stockholders, who must approve the deal. IBM says it expects the transaction to close within 60 days.

Corio provides businesses with hosted access to enterprise applications from vendors such as Ariba, Oracle, SAP, and Siebel Systems. Its customers include a number of major consumer and business-to-business companies, such as Birkenstock, Toshiba, and Visa.

Corio CEO George Kadifa will continue to manage the Corio business at IBM and will assume additional responsibilities within IBM's application services business. A number of Corio employees will transfer to IBM. All of Corio's 400-plus employees will transfer to IBM and there will be no layoffs, according to IBM officials.

At first glance, IBM's biggest challenge will be making Corio's operations profitable. In the first nine months of 2004, the company posted a net loss of $10.4 million. IBM, however, obviously sees potential in the business. Its per-share offer of $2.82 for each Corio share is a 38% premium over Monday's close of $2.05. In late-day trading, Corio shares were up more than 35% to $2.78

Mike Riegel, director for On Demand Strategy at IBM, says the purchase price, in part, reflects the value of Corio's intellectual property. Specifically, Riegel says Corio's technology and methodologies for rapidly deploying enterprise applications in hosted environments will boost the appeal of IBM's hosting offerings. "Customers now want access to new applications in minutes or hours, not weeks or months, and Corio excels at that," Riegel says.

Meanwhile, at least one Corio competitor says the deal could help boost prices in the ASP market. "Some of the smaller players in the market pursued market share at unsustainable prices. We expect IBM will be a more disciplined competitor," says Andrew Stern, CEO of USinternetworking Inc., which is backed by Bain Capital. Stern says that USi could itself eventually seek a buyer, or issue public stock, but says no immediate plans are in the works.