IBM buys FileNet for $1.6bn

IBM threw down a challenge to database rival Oracle on Thursday with a $1.6bn acquisition that marks its biggest software purchase in three years.

The acquisition of FileNet, a company that sells the content management systems that companies use to capture and manage many different types of digital documents, will also push IBM deeper into the software business at a time when its bigger hardware and services divisions have been struggling to grow.

The deal is set to double IBM’s share of the content management business and put it ahead of current industry leader Documentum, which was bought three years ago by storage company EMC.

Between them, IBM and FileNet accounted for about 18 per cent of the $3.2bn content management business last year, compared with 11 per cent for EMC, according to figures compiled by IDC.

That will put further pressure on Oracle to respond with an acquisition of its own, said Jim Murphy, a research director at AMR Research.

By helping to organise the many different types of “unstructured” data that companies amass, companies such as FileNet have become a critical part of the broader information management software that companies like IBM and Oracle are looking to sell. Shares in Open Text, the largest remaining independent company in the sector, climbed 3 per cent on news of the FileNet acquisition.

While FileNet “does not have any capabilities they don’t already have themselves,” the purchase of a company that last year had total revenues of $423m and net income of $40m will bulk up IBM’s presence in a corner of the software business that is likely to continue to see solid growth, said Mr Murphy.

The acquisition comes at a time when Oracle threatens to overtake IBM as the world’s second-largest software company, thanks to faster growth in its core database business and a string of big acquisitions of its own.

Last year Oracle’s revenues jumped to $14.4bn, while IBM’s revenues from software edged up by 4.4 per cent, to $15.7bn.

Sam Palmisano, IBM’s chief executive, has recently accelerated its push into the infrastructure software and middleware on which large corporate IT systems are built. IBM has made more than 50 software acquisitions in the past 10 years.

By comparison other big hardware companies, moving later than IBM into a business with greater profit and growth potential than their traditional businesses, have responded with more sizeable deals.

HP’s planned acquisition of Mercury Interactive, announced last month, will double its software revenues to around $2bn, putting it among the top dozen software companies, alongside EMC, which has also mounted a series of big purchases.

In the most recent quarter, IBM’s software division accounted for 19 per cent of the group’s overall revenues but 40 per cent of its gross profits.