This weekly review discusses IBM's acquisition strategy and how it has contributed to the company's success. The document summarizes that IBM has completed over 120 acquisitions since 2002, more than 70 of which were software related. These acquisitions have helped IBM expand into new markets, round out its product portfolio more quickly, and drive strategies like Smarter Planet. The review also examines IBM's recent acquisitions of Algorithmics and i2 as examples of deals that strengthen IBM's analytics offerings for industries like banking and retail. It concludes that IBM's track record of integration success positions it well to continue leveraging acquisitions for growth.

1. Weekly Review
Volume 7, Issue 37
September 14, 2011
In this issue:
 Getting Things Right—Software
and IBM’s Acquisition Strategy
By Charles King, Pund-IT, Inc.
Pund-IT, Inc. Contact:
Hayward, CA Office: 510-383-6767
U.S.A. 94541 Mobile: 510-909-0750
charles@pund-it.com
www.pund-it.com

2. Getting Things Right—Software and IBM’s Acquisition
Strategy
By Charles King, Pund-IT, Inc.
For decades, organizations have faced a challenging, elemental IT trend; even as technolo-
gy has evolved to deliver faster computation, greater storage and more seamless network-
ing, 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 (computation—servers and CPUs, media capacity and
read/write performance—storage, data access and transmission—networking). But maxim-
izing the value of IT investments has increasingly become the province of software invest-
ment and development.
Software as a Differentiator
Not surprisingly, software is a point of interest or focus for virtually every major IT compa-
ny, but it has become absolutely crucial to systems vendors. How crucial? Consider this:
 HP—While 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 deliv-
ers higher operating profits (21.2% measured as a percentage of revenue) than any oth-
er 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 acquisi-
tion, for which the company paid an eye-watering $10.3B, is meant to bolster HP’s “big
data” solutions. But some of Apotheker’s plans, including discontinuing webOS develop-
ment and selling or spinning off the company’s signature PC business have left many
HP shareholders and partners cold.
 Oracle—What is the next step for a vendor that owns what many observers would con-
sider the world’s largest enterprise software portfolio? How about “backing into” system
vendor status by buying an ailing Sun Microsystems, then tying Sun’s 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, Sun’s share of the general purpose server and enterprise hardware mar-
kets 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 IBM’s CEO in 2002, a considerable portion of the company’s
$6 billion annual research budget has been dedicated to software development. Software
also provides critical tools for sparking and differentiating the company’s industry-leading
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3. 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 IBM’s financial success.
In FY2010, IBM’s Software Group (SWG) delivered $22.5B of the company’s $99.9B in total
revenues. But it did so while delivering pre-tax margins of 35.8%: more than twice that of
IBM’s Global Services organizations (GBS/GTS) and over four times the margins of the com-
pany’s Systems and Technology Group (STG—servers and storage). The material results of
this performance have been great for the company and its shareholders—in FY2010, IBM
delivered robust earnings per share (EPS) of $11.52, a stunning achievement given overall
market conditions.
IBM’s 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 lever-
aged numerous deals to develop a clear leadership position. But it also applies globally,
expanding IBM’s 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, ac-
quired assets have been critical in the continuing evolution and ongoing success of the-
se and other initiatives.
Case Studies: Algorithmics and i2
IBM’s two most recent acquisitions provide valuable insights into how this strategy can
work.
 Algorithmics—A risk analytics firm, Algorithmics’ software, content and advisory ser-
vices are used by banking, investment and insurance businesses including 25 of the
world’s 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 re-
quirements and improve business decision making across financial risk domains, in-
cluding 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
IBM’s solution portfolio for the financial industry. But the company’s expertise also reso-
nates with IBM’s OpenPages acquisitions and should enhance the company’s Business
Analytics and Optimization Practice.
 i2—i2 provides intelligence analytics for crime and fraud prevention to over 4,500 cus-
tomers in 150 countries. The company’s clients span multiple global industries and sec-
tors, including banking, defense, health care, insurance, law enforcement, national se-
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4. curity and retail, and its software solutions are currently used by 12 of the world’s top
20 retail banks and eight of the world’s ten largest companies. i2’s considerable market
success would make the company an attractive asset for nearly any major vendor but
IBM’s 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” assets—information and intelligence collected from
disparate, unstructured sources including social media, biometrics, digital video collec-
tion and criminal databases, will present a continuing, growing challenge for organiza-
tions 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 mistak-
enly 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 company’s 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 con-
sulting and other services to technology vendors, the opinions expressed in this commentary are those
of the author alone.
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