Ka-Ching: IBM to spend $1.4B of $20B acquisition budget on Sterling

Computerworld - IBM reached deep into its $20 billion acquisition war chest today by agreeing to spend $1.4 billion to acquire Sterling Commerce, an AT&T subsidiary and maker of business-to-business software.

The pending acquisition is part of IBM's continuing strategy to focus on solving business problems and its belief - widely shared by the other large enterprise vendors - that the days of self-integration by users are either rapidly ending or are already over.

IBM lately has been particularly aggressive in assembling its product offerings, and was sure enough about its approach to tell investors this month that it would spend $20 billion buying companies through 2015. The total is more than IBM has spent on acquisitions over the last10 years.

Benoit Lheureux, an analyst at Gartner Inc. said he expects IBM will use Sterling's integration software "to put together industry solutions that bring all those bits and parts together. Can they do that? IBM is more capable than Sterling was."

The Sterling technology is mostly used in supply chain, payment management, logistics, and other services.

The Sterling technology can also be used to add capabilities to IBM's own WebSphere middleware. When the deal closes, probably later this year, Sterling will become which is part of IBM's WebSphere division.

"There are open source options that are less expensive alternatives to the WebSphere infrastructure," said John Rymer, an analyst at Forrester Research Inc., in an interview prior to the announcement. "What they have to do is create new reasons for people to buy their application infrastructure and not just go to open source."

Sterling Commerce also seems to fit IBM's acquisition template, which was outlined just last Tuesday by Mark Loughridge, IBM senior vice president and chief financial officer, during a briefing with analysts. IBM isn't looking for firms to "bolt on" to the company and deliver bottom line help through cost cutting. Instead, it is seeking to buy firms that can quickly boost revenue by expanding their worldwide market.

"IBM and Sterling Commerce are a great and natural fit," said Bob Irwin, Sterling Commerce president and CEO, during a conference call late Monday morning. He said the merger will allow Sterling to extend its business into new vertical markets, such as health care, and to expand globally.

Irwin also said "there's a great cultural fit between the two companies," and that the move will provide Sterling workers with an "opportunity for professional and personal growth."

IBM said that software's share of the firm's total income has risen from 34% to 42% over the past six years. IBM believes software will be at 50% within the next five years.

Sterling Commerce has 18,000 customers, and IBM believes the acquisition will substantially improve the way users connect and communicate with their customers, partners and suppliers."

"This is a rapidly growing area that is very attractive," said Craig Hayman, general manager of IBM's Software Group's application integration and middleware business, of the acquisitions. Users want the increased productivity "they can achieve from automating and improving the relationships with their trading partners," he said.

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov, or subscribe to Patrick's RSS feed . His e-mail address is pthibodeau@computerworld.com.

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