Software is the straw that stirs IBM's unique blend of profit-making mix. This is no more evident than in Big Blue's May 24 announcement of its intent to acquire Sterling Commerce, a subsidiary of AT&T, for approximately $1.4 billion in cash.
That IBM announced its acquisition plans as the month of May comes to an end is no surprise, as on May 12 the company told investors and analysts that it was looking to continue to expand in the software arena. During IBM's meeting with its investors, company CEO Sam Palmisano said the company's acquisition strategy will continue to focus on software companies that align to IBM key growth plays, including analytics, Smarter Planet and cloud computing. Earlier this month, IBM bought privately held Cast Iron Systems, which delivers software to help companies integrate cloud applications.
IBM said it will spend $20 billion on acquisitions over the next five years and that the focus in this area will remain on software companies, given its higher margins and that it is IBM's most profitable business. Since 2003, IBM has acquired 57 software companies for around $13 billion. IBM's software business continues to be highlighted as a key contributor to IBM's profits and growth. IBM projected its software business will become almost half of the company's profits by 2015.
The move to add Sterling Commerce to the mix is aimed at expanding IBM's efforts to help customers develop more intelligent business networks by simplifying the way organizations connect and communicate with their customers, partners and suppliers-on premises or through a cloud delivery model. The deal is a complement to the Cast Iron deal, and indicates IBM's seriousness about delivering a hybrid model-on premises and cloud-with its software and services solutions.
"This is a growth market," said Craig Hayman, general manager of IBM WebSphere software. "And we choose to focus on high-growth opportunities." Hayman said IBM will integrate its Cognos business analytics technology, Ilog business rules technology, as well as Cast Iron cloud and Lombardi business process management technology with the Sterling Commerce platform, "so we can bring these end-to-end capabilities to the Sterling domain."
Indeed, Hayman said Sterling's solutions will become part of the IBM Software Group's industry frameworks offerings.
IBM Software is a key driver of growth for IBM. In the first quarter 2010, IBM Software revenue grew 11 percent year to year. Fueled by investments in these and other high-value, high-margin software opportunities that help businesses improve their performance and competitiveness, the profitability of IBM software has nearly tripled to more than $8 billion since 2000.
Sterling Commerce complements IBM's business process integration and transaction software portfolio, which grew more than 20 percent in the first quarter of 2010. The combination of IBM and Sterling Commerce supports the backbone of business transactions. Simplifying these transactions is a key underpinning of IBM's Smarter Planet campaign to automate, transform and improve virtually every aspect of business and society-from electrical grids and transportation to health care, government operations and food protection, to name a few.
Sterling Commerce is a leading provider of business transaction and selling and fulfillment software. The addition of Sterling Commerce will accelerate IBM's efforts to capture more share in the business integration software and services market. Market research firm Gartner estimates this market is $5 billion and growing at 10 percent annually.
More than 18,000 global customers rely on Sterling Commerce software in a broad range of industries, including financial services, retail, manufacturing and distribution such as Boston Market, Farmers Insurance, Honeywell, Boise Cascade, Monsanto, Pitney Bowes, among many others. The company manages more than 1 billion interactions per year for these customers.
IBM's Hayman said the addition of Sterling Commerce is attractive because of the cost savings customers can gain from automating their interactions with their business partners.
Bob Irwin, president and CEO of Sterling Commerce, said he believes "IBM and Sterling Commerce are a great and a natural fit together. He said Sterling's business integration suite is a perfect complement to IBM software, and Sterling's fulfillment technology complements IBM WebSphere." Irwin also said he expects the IBM acquisition to help Sterling technology move into new vertical markets and geographic areas, particularly, Japan, China and Eastern Europe.
Meanwhile, Hayman said Sterling Commerce and the company's employees -- "Sterlites" as Irwin referred to them during a May 24 press conference -- will join the IBM WebSphere team and be part of the IBM Software Group. Also, IBM, which did not have a major IBM presence in the Dublin, Ohio, (near Columbus, Ohio) area where Sterling Commerce is headquartered, will indeed have such a presence should the acquisition pass regulatory approval, Hayman added.