Cognos Buys More Pipe for IBM

By Darryl K. Taft  |  Posted 2007-11-12

Cognos Buys More Pipe for IBM

Analysts and industry watchers seem to have green lighted IBMs proposed deal to acquire Cognos for $5 billion, except for a few caveats about the consolidating market, customer management and technology agnosticism.

IBM announced plans to acquire Cognos, a leading business intelligence software maker for $5 billion on Nov. 12, further consolidating the BI market following SAPs acquisition of Business Objects last month and Oracles acquisition of Hyperion Solutions last March.

Guy Creese, an analyst with Burton Group, said IBMs acquisition of Cognos fits in with IBMs information management initiative and "they get a company with $1 billion in revenue."

Creese said that by gaining access to the Cognos customer base, IBM also gains "entree into companies that have already committed to BI. And with IBM using information as a service, they want to own that whole conduit."

The conduit or "pipe" Creese is talking about is the data pipeline that runs from the database, which IBM owns through DB2, to the transformation phase, which IBM owns through Ascential, to the reporting, which IBM will own through Cognos.

"So the idea is when you go to IBM [or Oracle or Microsoft] you buy a piece of information infrastructure that theyve connected all together," Creese said. "You just add the data. You historically had to go to three different vendors for this, but that has changed over time."

Meanwhile, said Creese, "the part theyre not talking about is that the dance floor is quickly getting empty. After Cognos, SAS is the only big BI player left, but they are privately held. IBM realized if they didnt buy Cognos they wouldnt have a whole lot of options."

Boris Evelson, an analyst with Forrester, said: "Now that IBM is acquiring Cognos, will HP follow the same fate and acquire smaller Information Builders, Microstrategy or Actuate? Theres also still SAS that would give HP a complete BI stack, but as we know, acquiring the worlds largest privately held company can be a financial and cultural fit nightmare."

Evelson said he believes both IBMs acquisition of Cognos and SAPs acquisition of Business Objects are defensive moves, "since both companies have been telling us for years that they prefer to grow their BI portfolios organically, with smaller tuck-in acquisition.

"However, organic growth is not happening fast enough, and giving in to sideway pressures from Oracle [with two top of the line BI products from Siebel and Hyperion] and upward pressures from Microsoft [after the Proclarity acquisition and with significant Performance Point market momentum], IBM and SAP had no choice but to react."

Steve Mills, IBM senior vice president and general manager of the IBM Software Group, said IBM does not do "defensive" acquisitions and that the company has had a long relationship with Cognos and decided to acquire the company because of changing market forces.

Creese said a look at Cognos financial statement shows that "they make more in support and service than licensing, which is worrisome because they make more in maintenance of existing customers as opposed to getting new customers." He said IBM, as a services company, likes the services aspect of the deal, "but I fear they may not go after new business aggressively."

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During a press conference on the deal, Rob Ashe, president and CEO of Cognos, said, "on the business and customer side, we couldnt be more excited about how IBM plans to approach this marketplace and thats all about growth ... Well be able to do a lot more than we could on our own given IBMs global reach."

In addition, Ashe said the deal provides leverage for Cognos customers because there is practically no product overlap. That also enables Cognos to "focus on innovation, not having to deal with product overlap or rationalization."

Creese said Cognos customers gain from "knowing how the game is going to be played out." He said when SAP acquired Business Objects, observers were wondering what would happen next.

Dana Gardner, an analyst at InterArbor Solutions, said: "The thought on the street was that Cognos had to get bought soon, given the business intelligence consolidation land grab of late."

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However, Ashe said when IBM initially made an overture, Cognos was not for sale. "We felt no need to go out and sell ourselves," because of the increasing consolidation in the market, he said.

But with the proposed acquisition, Cognos customers will benefit from the depth of IBMs service and support, observers said.

Creese noted that both Business Objects and Cognos have boasted of being agnostic, "but now as part of IBM, will Cognos make sure DB2 is the first version they ship," he asked. Creese said he did not believe IBM would function that way. IBMs Mills acknowledged that it would not.

Evelson said many questions arise from the IBM/Cognos deal. "But the main one that puzzles me is, will IBM completely deviate from their strategy of not being in the apps game now that it will be competing head to head with Oracle, SAP and Microsoft on BPS [Business Performance Solutions]? Whats next, an ERP acquisition of Lawson or Infor? Or a CRM acquisition of playing on IBMs latest Information On Demand strategy?"

Mills addressed the issue of IBM and the applications business during the press call, saying, "we have some application technology in our portfolio" such as Lotus Notes and WebSphere Commerce Server, but these are technologies that sit outside the traditional application space. So IBM views that technology as well as the Cognos BI technology as being a "horizontal" play.

Evelson said other, more obvious, questions include: "What happens to the IBM and Cognos reliance on partner network, such as IBMs strong relationship with Business Objects and Cognos relationship with Informatica? I am sure politically correct answers from both companies will be status quo but I dont think thatll cut it for the IBM salesforce pitching to the same accounts and for the same opportunities as Business Objects and Informatica."

Another question is: "Will Cognos be a key component in IBMs intent to highly optimize enterprises," Evelson said. "Absolutely yes. IBM is likely to pour significant dollars and resources into making its overall BI [including Cognos] offering process centric—a key component in our opinion to ultimately optimized enterprises."

The bad news, Evelson said, is that "all new BI behemoths—IBM, Oracle, SAP, Microsoft—will now be forced to spend more time on product integration, potentially pulling resources away from and reducing priorities of new functionality development.

"Watch remaining smaller pure plays [SAS, Microstrategy, Information Builders, Actuate] and Tier 2 BI vendors [Panorama, QlikTech, Jaspersoft, Pentaho, Logixml, Inforsense and many others] jump on that opportunity. Good news is that the BI market is very hot."

Tony Baer, an analyst with onStrategies, said: "The other shoe has dropped. But its really no surprise at all. Just look at how investors have been bidding up Cognos stock since the SAP-Business Objects deal. Given the fact that Cognos is the only Tier 1 independent left, a 9 percent premium on the share price would have otherwise looked rather modest."

Baer also pointed to a possible Web 2.0 connection.

"The deal does create room, maybe even a vacuum, for midmarket players to fill," Baer said. "At this point theres no clear anointed successor to pick up the mantle of BI 2.0: a dynamic, easy-to-use BI approach thats highly dynamic, borrowing the best of Web 2.0 technologies with innovative approaches to smart data caching. Whoever rises to that challenge should find a very receptive audience."

Gaurav Verma, product marketing manager at SAS Institute, said: "IBM just now gains business intelligence/query and reporting and financial performance management from Cognos. However, IBM still does not have predictive and advanced analytics or vertical-specific apps.

"SAS is the largest independent software vendor offering companies integrated business intelligence/query and reporting, data integration and analytic capabilities with a long line of vertical-specific applications."

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