Last updated: November 12, 2007 8:00 pm

IBM in $5bn cash deal for Cognos

IBM unveiled its biggest acquisition on Monday with the $5bn cash purchase of software maker Cognos.

The deal marks Big Blue’s response to the rapid consolidation of the business intelligence software market, which was triggered by Oracle’s recent purchase of Hyperion and SAP’s agreement to buy Business Objects.

It also accelerates the company’s acquisition-fuelled drive to boost the size of its software business, which already accounts for 20 per cent of revenues and 40 per cent of gross profits.

Although IBM pulled off 11 software deals last year, and its software strategy was given a big lift more than a decade ago by the $3.5bn purchase of Lotus, it has typically looked at deals worth $1bn or less.

Business intelligence software, which draws data from a range of corporate systems to give business managers a view across their operations, has long been seen as a strategically important part of the software market.

Analysts said the purchase of the three biggest business intelligence companies for a total of $15bn largely completes a wave of consolidation in the corporate software market. The deal frenzy has encompassed some of the biggest categories of business software, from application software makers such as PeopleSoft to middleware companies such as BEA Systems, which has been the subject of an unsolicited approach from Oracle.

Business intelligence “was the last of the biggies”, said Lee Geishecker, an analyst at AMR Research. Future acquisition activity is likely to focus on companies with specific industry expertise or geographic presence, she added.

Steve Mills, head of IBM’s software business, denied that the acquisition of Canada’s Cognos had been prompted by other deals in the sector.

“If IBM was going to invest in this space, Cognos was the logical offering,” said Ms Geishecker. Acquisitions by its rivals might have forced IBM’s hand in terms of timing, she added, since Cognos’ position as the only big independent company left might have attracted other potential acquirers such as Hewlett-Packard.

Owning Cognos would help IBM sell more of its other “middleware”, including its Websphere and DB2 database products, said Steve Mills, head of IBM’s software business.

Mr Mills claimed that the architectural similarity between Cognos’ software and that of IBM would make it possible to pull off a rapid integration of the two companies’ products. He contrasted that with Oracle, which faced a fundamental rewrite of much of its code to assimilate a number of acquisitions, and SAP.

At $58 a share, the deal represents a premium of nearly 10 per cent to Cognos’ share price at the end of last week. Cognos is Canada’s largest software company, with 4,000 employees.

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