IBM Mergers & Acquisitions: Who’s Next?

by

ERP Analyst, Software Advice

At the ripe old age of 100, Big Blue is still making waves in nearly every part of the technology stack. IBM’s current portfolio is so broad that it’s practically a one-stop shop for enterprise technology.

As Vital Analysis founder Brian Sommer puts it, “On a bad day, they’ve got 60% of the technology any business could possibly need.”

But IBM’s not done yet. The company recently stated that they will spend $20 billion on mergers and acquisitions in the next five years. With this as a backdrop, we thought it would be fun to guess who IBM will acquire next.

We should also note that IBM has only made one acquisition this year, Tririga. For a company ready to spend $20 billion, it leaves us speculating that there must be plenty of deals in the pipeline. Here’s our prognostication on who they’ll target.

The Last Decade of Deals

To get started, let’s take a look at the last ten years of IBM’s M&A activity.

IBM Mergers & Acquisitions

Our diagram includes all acquisitions since their 2001 purchase of Mainspring. As you can see from the graphic, IBM has aggressively purchased services firms, acquiring 14 in the last decade. Trailing at a close second in terms of the number of acquisitions is their 13 purchases in middleware. Then of course, there is the focus on business analytics which is marked by a couple of billion dollars plus deals (Cognos & SPSS).

What Deals Will the Next Decade Bring?

We’ve identified eight key areas that we think IBM is likely to focus their purchases on.

The central criteria we see at the core of IBM’s M&A strategy is going after companies and technologies focused on the business of tomorrow. What does this mean exactly? We think they will focus on companies that offer:

  • Software for managing cloud infrastructure;
  • Software for managing applications in the cloud;
  • Enterprise applications in the cloud;
  • Professional services for cloud migration;
  • Networking hardware and software;
  • Virtualization platforms and related tools;
  • Analytical tools for “big data” analysis; and,
  • Other professional services.

Cloud Infrastructure Management Systems

It’s no secret that IBM is betting on the cloud. In fact, Big Blue estimates that their cloud computing business will grow to $7 billion by 2015. This is possible given that the global cloud computing market is expected to be $120 billion in the same time frame.

Beyond the big iron that is needed to power the cloud, there is an opportunity for IBM to provide software for managing cloud infrastructure. Much like IBM’s Tivoli business unit has provided systems management tools for the on-premise environment, a whole new opportunity is emerging to provide systems that manage cloud environments – public and private.

As Dave Rosenberg, CEO of Soba Labs, puts it, “Ultimately the real money in things like cloud and virtualization is going to be on the management end.” Here are a couple of vendors that specialize in managing cloud systems that are attractive targets.

Eucalyptus is a start-up software company that specializes in deploying and managing private cloud systems. They provide support for enterprises that need to manage a private cloud. On the public side of things, RightScale could be an alternative move. RightScale currently works with almost every public cloud provider and has already launched more than 2 million servers. RightScale is also attractive for their involvement on the services end, which IBM is always looking to bolster.

Alternatively, IBM may want to go with a larger company. Cloud.com has shown some promise in this market. Cloud.com specializes in implementation on and build out of tools on private clouds. They have a global footprint and a large customer base. Additionally, they operate on a long sales cycle and typically sell to large businesses. Cloud.com could benefit from having someone of IBM’s scale to run its operations.

Cloud Application Performance Management

In addition to managing cloud infrastructure, IBM will stand to gain from supporting the efficient operation of applications in the cloud. For this reason, buying a vendor that monitors the performance of applications in the cloud and in data centers is one area IBM could concentrate.

AppDynamics specializes in software that monitors application efficiency in data centers. They already have a customer base of 30,000 users, with businesses like Taleo and SuccessFactors among them. It’s a low-risk purchase. Alternatively, they could go after NewRelic, which is less popular than AppDynamics but supports more programming languages.

But IBM may prefer to go with a hybrid vendor, one that can manage cloud application performance and infrastructure. ManageEngine can monitor applications in cloud and virtualized environments as well as perform server management. ManageEngine already supports IBM, Oracle, and Microsoft applications as well as many open source vendors. Any of these targets would fit with IBM’s tendency to buy applications that operate deep in the technology stack and are built for IT personnel.

Cloud Enterprise Applications

Then there are the applications themselves. Historically, IBM has steered clear of enterprise apps in an effort to maintain partnerships with big vendors like SAP. That’s probably the largest gap in their portfolio, and one they are less likely to fill.

With Oracle stepping onto IBM’s turf, it might be worthwhile for IBM to move into the enterprise application market. But who’s left to buy in an already consolidated market?

“Infor has bought up tons of predominately older software companies and Oracle has bought pretty much everyone else,” explains Sommer. “If you’re going to buy anybody, you’re going to have to buy a new kind of vendor that has something radically different to offer.” – Brian Sommer

For IBM, this would likely be a vendor with a great mix of cloud offerings. A few years ago, Salesforce.com was rumored to be in talks with Oracle. At least one analyst is still predicting an Oracle purchase. But if IBM were to land the deal, Salesforce would offer serious cloud credentials with their CRM customer base, Force.com platform, VMForce, and extensive list of apps. Then again, IBM doesn’t seem prepared to sell CRM in the kinds of deals Salesforce is involved in. Their $18.7 billion market cap and P/E of 406x may also keep IBM at bay.

Let’s not forget the cloud ERP darling, NetSuite, as a possibility. They’ve got their own platform and, as Sommer notes, “if you put that behind the IBM consulting services, [they] could be de-installing legacy accounting systems by the thousands.” It’s also a great opportunity to buy capacity for IBM’s own data centers. There’s just one hang up: Larry Ellison owns a majority share in NetSuite and could (would?) block a deal.

IBM could also go after Workday. The Workday suite is built for the large enterprise customers IBM typically deals with. Their suite of human resources and accounting would be a platform acquisition that IBM could build off in the future. Although Workday does not have the customer base of a Salesforce, they are gaining momentum and serve the needs of large enterprises. Of course, Workday’s intention to move upstream in the enterprise might sour IBM’s relationship with SAP.

Cloud Professional Services

Services is a huge area of focus in the IBM acquisition machine. In the last ten years, IBM has purchased 14 different services companies.

Today, services are are a major driver in their revenue and there is no reason to think that will change in the near future. As IBM shifts more focus to things that run in the cloud, providing services that specialize in this area is likely to be a focus.

Appirio would add a cloud services offering to the IBM portfolio. Appirio has a healthy mix of cloud services and products that IBM could bring into their portfolio. Appirio’s recent emphasis on integrating multiple cloud apps to a single mobile device would also be a hot commodity as mobile integration services draw more interest in the enterprise. They also offer services that would add a hip element to their services story.

Another company similar to Appirio that would bring cloud chops to IBM professional services is Xorbix Technologies. Xorbix already works with some of Salesforce.com and Google’s largest customers. Xorbix also has experience in mobility. While they are an attractive alternative, they are not generating the same kind of hype of an Appirio. This acquisition would still make sense but wouldn’t likely be as big of a headline grabber.

Network & Service Assurance

The network is converging and integrating with computing and storage systems. As Frank Gens, IDC Senior Vice President and Chief Analyst, notes, “buyers are sick of wasting cycles doing their own systems integration or hiring expensive integrators. They want suppliers to pre-integrate.”

However, IBM isn’t a strong presence in the networking market. Instead, they have OEM agreements to resell networking equipment from Cisco, Brocade, and Juniper. If IBM made a sizable purchase in networking, they could immediately compete in this market. Their 2010 acquisition of Blade Networks may be an indication that IBM is looking at networking more seriously.

In 2010, Gens suggested that IBM would snap up Juniper. It didn’t happen, but we still think it’s a likely target. With a purchase of Juniper, IBM would get over 30,000 customers, a network switch offering, and a leadership position in networking. Of course, such a purchase would upset the IBM-Cisco alliance, which may take precedence over becoming a major player in this market.

If IBM wants to make a purchase in the network space without making such a splash, they could go with Brocade. Brocade has a much lower market cap and competes less intensely with Cisco. This would ruffle fewer feathers amongst their existing partners.

Virtualization

IBM hasn’t invested heavily in this part of the infrastructure stack. Instead, according to Dave Rosenberg, “they’ve been a supporter of Linux-KVM and stood by hoping that Linux-KVM would defeat VMware.” This strategy simply hasn’t worked and the result is VMware’s dominance in the virtualization market. Companies looking to challenge VMware could use IBM’s scale to compete in this market.

Citrix, one of VMware’s direct competitors, is still operating independently. Citrix is a fairly aggressive consolidator itself and has a great technology portfolio to offer, in addition to their flagship XenApp product. While this would be a pricey acquisition given Citrix’s $14 billion market cap and P/E of 47x, IBM could free up the capital for it.

Then again, IBM could cut to the chase and buy EMC outright. Convincing EMC to sell VMware is out of the question. But IBM is one of the few tech companies with the purchasing power to make an EMC deal happen. Big Blue would have to give up a pretty penny considering EMC’s $55 billion market cap and P/E of 29x. However, they’d take the dominant lead in virtualization and data storage.

Alternatively, IBM may decide against buying a core virtualization company and purchase a complementary solution. Tintri, the virtual machine storage appliance vendor, is making waves in this space but they have a difficult path of competition going against products from VMware and NetApp. IBM could scoop them up and sell their appliance without entering the market for core virtualization.

Data Warehousing

Managing and analyzing big data is one of the biggest focal points for IBM as a company. Although they’ve made significant investments in big data, there is no doubt that they’d like to keep rounding out their solution portfolio. Informatica provides tools to help companies build massive data warehouses. They’re still independent and a likely target for IBM.

Informatica is a natural fit with the IBM big data story. Their specialization in analytics and data warehousing would fit cleanly into the IBM portfolio. Additionally, their recent work in integration technology makes them a valuable asset. It’d be an expensive purchase with a market cap of $5.7 billion and P/E of 59x. But hey, why not integrate the competition?

If IBM’s interested in an even bigger data warehouse play, they might consider business analytics giant SAS. CEO Jim Goodnight turned 68 this year and one has to think he’s considering his exit strategy. IBM’s history of integrating acquisitions into the company would likely appeal to goodnight who spent considerable time building the SAS culture.

More Professional Services

Naturally, IBM may not want to invest too much of their professional services in the nascent cloud market. We could see IBM purchasing a services firm with a more traditional business focus. Two services firms come to mind: Cognizant and GenPact.

Although it’s still performing well, the New Jersey-based Cognizant's stock recently took a hit because of a dispute over using their Indian-based labor pool for US business. This might be a good time to swoop in and do a deal. The company is attractive for their low-cost IT services, business process outsourcing (BPO), and support for industry verticals and technology horizontals.

GenPact, on the other hand, is a business process consulting firm that would mesh well with IBM. With over 530 Six Sigma black-belts and 24,000 Lean certified employees, they would be a great addition to the army of IBM consultants.

Who Do You Think They'll Acquire?

Whew! So there you have it: a few of my predictions for where the IBM merger and acquisition machine is headed. Who do you think they’ll go after first? Or, did I miss someone entirely? Feel free to leave a note in the comments below.

A special thanks to Brian Sommer, Dave Rosenberg, and Sramana Mitra for their insightful analysis and help in the research process.

 
  • Guest

    They can acquire Arista Networks

  • CLOUDER

    They have been eyeing Akamai since 2004. Their cloud recent partnership proves that point….So thst would be a big acquisition in cloud space!

  • http://1m1m.sramanamitra.com Sramana Mitra

    I don’t believe Benioff has any interest in selling Salesforce.com to anybody.

  • Guest

    IBM is going to acquire OSIsoft which is market leader in data integration business, which is leverage for IBM’s Smarter Planet initiative.

  • Kerrykissnger

    I like your though process on EMC. Yes it would be way too pricey (read risky), but the one thing that IBM has been wise to avoid in the past 10 years is creating a major culture war within its ranks. All the other acquisitions have been too (relatively) small to create a major cultural digestion problem for IBM, but EMC? Major indigestion!!! The two companies couldn’t be more dissimilar, culturally.

  • Piannelli

    What about NetApp?

  • http://www.facebook.com/people/Eric-Collins/1566651112 Eric Collins

    IBM doesn’t like to own applications, that’s why Salesforce.com is unlikely.

    Personally, I think Juniper is a great fit. Cisco pissed off HP and IBM by creating UCS and directly targeting that customer set.

  • Paul

    I wonder about where IBM will take
    their FileNet/ ECM offerings.  Due to their size and structure, they are
    clearly focused on the top of the Enterprise stack.  While they have made
    noise about coming downstream and more effectively addressing the medium size
    businesses, we feel they cannot do this and be profitable.

  • Anonymous

    How about SugarCRM?

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