Weekly Review

Volume 7, Issue 37 September 14, 2011

In this issue:

Getting Things RightSoftware and IBMs Acquisition Strategy

By Charles King, Pund-IT, Inc.

Pund-IT, Inc. Hayward, CA U.S.A. 94541

Contact: Office: 510-383-6767 Mobile: 510-909-0750 charles@pund-it.com www.pund-it.com

Getting Things RightSoftware and IBMs Acquisition Strategy

By Charles King, Pund-IT, Inc. For decades, organizations have faced a challenging, elemental IT trend; even as technology has evolved to deliver faster computation, greater storage and more seamless networking, the information generated and supported by those solutions has continually expanded in size and complexity. How can vendors help customers deal with this conundrum? Some areas are largely the purview of hardware development (computationservers and CPUs, media capacity and read/write performancestorage, data access and transmissionnetworking). But maximizing the value of IT investments has increasingly become the province of software investment and development. Software as a Differentiator Not surprisingly, software is a point of interest or focus for virtually every major IT company, but it has become absolutely crucial to systems vendors. How crucial? Consider this:

HPWhile 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 delivers 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 HPs big data solutions. But some of Apothekers plans, including discontinuing webOS development and selling or spinning off the companys signature PC business have left many HP shareholders and partners cold. OracleWhat is the next step for a vendor that owns what many observers would consider the worlds largest enterprise software portfolio? How about backing into system vendor status by buying an ailing Sun Microsystems, then tying Suns 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, Suns 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 become an implicit model for HP, Oracle and some others software strategy evolution. Why would that be the case? In large part, because IBM has been at it longer and more successfully than any other major vendor. Software + Acquisitions = Success Since Sam Palmisano became IBMs CEO in 2002, a considerable portion of the companys $6 billion annual research budget has been dedicated to software development. Software also provides critical tools for sparking and differentiating the companys industry-leading
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global services organization. But perhaps most importantly, IBM has executed over 120 corporate acquisitions since 2002, more than 70 of which were software-related. By almost any measure, these acquisitions have played a key role in IBMs financial success. In FY2010, IBMs Software Group (SWG) delivered $22.5B of the companys $99.9B in total revenues. But it did so while delivering pre-tax margins of 35.8%: more than twice that of IBMs Global Services organizations (GBS/GTS) and over four times the margins of the companys Systems and Technology Group (STGservers and storage). The material results of this performance have been great for the company and its shareholdersin FY2010, IBM delivered robust earnings per share (EPS) of $11.52, a stunning achievement given overall market conditions. IBMs Acquisition Model How 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 IBMs 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, acquired assets have been critical in the continuing evolution and ongoing success of these and other initiatives. Case Studies: Algorithmics and i2 IBMs two most recent acquisitions provide valuable insights into how this strategy can work.

AlgorithmicsA risk analytics firm, Algorithmics software, content and advisory services are used by banking, investment and insurance businesses including 25 of the worlds 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 requirements 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 IBMs solution portfolio for the financial industry. But the companys expertise also resonates with IBMs OpenPages acquisitions and should enhance the companys Business Analytics and Optimization Practice. i2i2 provides intelligence analytics for crime and fraud prevention to over 4,500 customers in 150 countries. The companys clients span multiple global industries and sectors, including banking, defense, health care, insurance, law enforcement, national se3

curity and retail, and its software solutions are currently used by 12 of the worlds top 20 retail banks and eight of the worlds ten largest companies. i2s considerable market success would make the company an attractive asset for nearly any major vendor but IBMs 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 assetsinformation 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 Thoughts Any study of acquisitions reveals a spotty record of success. Companies sometimes mistakenly value the businesses they acquire or pay too much for assets that they are convinced they want. Other times, an organization will take a flyer on a company headed irrevocably downhill, mistaking its own capacity to successfully turn things around. All too often, a clash of corporate cultures can dooms deals and result in open wounds that risk the literal health of the acquiring company. IBM understands these risks intimately and has done well in avoiding problems that have tripped or crippled competitors by getting things right to begin with. This history of past successes is, in part, reflected in the companys plans to spend an additional $20 billion on acquisitions between 2010 and 2015, envisioning these deals as an essential part of its growth strategy. Given the central position software inhabits in IBM solutions, we expect those technologies will be crucial elements in many of these acquisitions. And if the past is any indicator of the future, we expect that many or even most of these deals will help drive continuing 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 these changes will have on business customers and the greater IT marketplace. Though Pund-IT provides consulting and other services to technology vendors, the opinions expressed in this commentary are those of the author alone.