Rational Continues Buying Spree

Rational mirrors IBM's aggressive acquisitions policy.

ORLANDO, Fla.—Over the past 10-plus years, IBMs Software Group has been among the most aggressive in the industry in buying other companies to fill holes in its portfolio.

The software division has bought 61 software companies since 1995—and 45 since 2000—and the purchases are paying off. Company officials at IBMs annual investor meeting May 17 said that they expect software to account for nearly 50 percent of IBMs total profits by 2010—up from about 40 percent in 2006. In 2006, the Software Group generated $18.2 billion in revenue, making IBM the second-largest software company behind Microsoft.

Many of the acquisitions have been made by IBMs Tivoli, DB2/Information Management and Lotus units. Now, as the newest member of the companys software family, Rational—which produced double-digit revenue growth in the first quarter of 2007—is aggressively going after other companies to grow its offerings.

At the Rational Software Development Conference here June 10-14, Danny Sabbah, general manager of IBMs Rational business unit, announced that Rational is buying two more companies, Watchfire and Telelogic. In addition, May marked the one-year anniversary of Rationals acquisition of BuildForge, a company focused on delivering build management solutions.

In an interview, Sabbah said the fundamental reasons for IBMs recent software investments have been to expand the range of offerings, gain share in existing markets, enter new markets with a strong offering and drive growth by adding new revenue streams.

/zimages/3/28571.gifRead here about IBMs road map for Rational tools.

"Historically, weve been able to smoothly integrate these firms into IBMs operations—unlike so many of the failed marriages in the IT industry—whether [they were] major acquisitions like Lotus, Rational, PWCC [PricewaterhouseCoopers Consulting], or the dozens of smaller firms weve acquired," Sabbah said.

BuildForge was a good example of that, he said. The company had a build management tool with a good track record and already was a Ready for IBM Rational Software Business Partner with more than 80 percent of its customers deploying Rational software. IBM, of Armonk, N.Y., acquired BuildForge to give it a more comprehensive software development platform that would enable development teams to standardize repetitive tasks; manage compliance mandates; and share information throughout the cycles of writing code, building an application and releasing it into production acquisition, Sabbah said.

Within a month of BuildForges acquisition, IBM delivered Rational BuildForge Version 7.0 as part of the broader IBM Rational Software Delivery Platform Version 7.0 to improve collaboration and software quality, the company said. IBM also was able to expand BuildForges reach beyond U.S. borders, including emerging areas such as India and China.

"It was a build-or-buy decision," Sabbah said. "We did our due diligence and settled on BuildForge. And we needed a way to bridge it to the Tivoli family—to bring IBM into a more favorable position following from software development to overall systems management and operations."

Derek Hutson, worldwide sales leader for Rational BuildForge, said IBM has been a major influence on his company. "Before the acquisition we were channel constrained," Hutson said. "We had a market that was starting to heat up, but we had a small sales channel and no international market. Now we have a huge sales channel within IBM. Just think of this as a channel relationship."

The acquisition also worked out for Tom Pierno, version management director at Metropolitan Life Insurance Company and a BuildForge customer, who said he was happy with the company before the IBM acquisition and is satisfied now. It helped that MetLife also was an IBM customer.

"Its a little different but generally very positive," Pierno said of the post-acquisition BuildForge. "IBM and MetLife have a long-standing relationship."

MetLife, which is based in New York, chose BuildForge because "if you look at your current installed base you have to look at the software thats in place. BuildForge doesnt require a new shift into a language or a particular type of method; it takes existing build scripts and enables you to manage them."

In addition, Pierno said MetLife is "one of the power users of [BuildForge], and its been stable and its been beneficial to us." Sabbah said he is expecting the same success with Watchfire and Telelogic. The Watchfire technology, in combination with IBM Rational quality management software, will help customers reduce security risks and associated costs to their bottom line, he said. The combination of Watchfire and Rational will enable users to identify and address security risks in their applications before the applications go live, something that cannot be offered by Microsoft, Hewlett-Packard or Borland Software, Sabbah said.

With Telelogic, IBM acquires—for $745 million—a competitor and market leader in the requirements management space. According to Gartner, Telelogic outranked all vendors in that sector with 37.1 percent market share. IBM was second with 24.6 percent. In the object-oriented analysis and design space, Telelogic had 20.6 percent of the market, second to IBMs 47.8 percent.

IBM, via the Telelogic acquisition, hopes to tap further into the market for embedded systems development for building applications for products such as the software in an intelligent home network that controls the entertainment devices, security systems, appliances and lighting, or automotive applications, he said. Research company Venture Development said the market for embedded software development was $51 billion in 2006.

That acquisition strategy has proven effective for IBMs Software Group as a whole. In 2006, IBM invested almost $5 billion in 13 acquisitions, including several larger acquisitions: FileNet ($1.6 billion), Internet Security Systems ($1.4 billion), Micromuse ($900 million) and MRO Software ($700 million). In the fourth quarter of 2006, IBMs software revenue growth from 2006 acquisitions was up about 50 percent year-over-year, the company said.

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