Despite The Rumors, IBM Says No Interest In Software Mergers
Friday May 20, 7:00 pm ET
J. Bonasia
The software industry has entered a phase of rapid consolidation, which makes for lots of juicy gossip on Wall Street. Pundits love to guess about who will buy whom and which stocks stand to benefit most.
One big rumor is that IBM is hunting for troubled applications software makers to buy. Applications software is used to run business processes such as finances, human resources and supply chains.
There's a big problem with those rumors, says Steve Mills, senior vice president in charge of the IBM Software unit: IBM (NYSE:IBM - News) has no plans to enter the applications market.
Instead, he says IBM will continue to focus on its middleware and infrastructure software. Mills' group includes the Rational (testing), Tivoli (storage), WebSphere (Web services), DB2 (database) and Lotus software brands. Of those, only Lotus, software for work groups, is close to an application type of software.
In a recent interview, Mills stressed that IBM has made its position very clear. "We are not in the applications business, nor do we have any intention to be in the applications business," he said.
Yet, when PeopleSoft was fighting off hostile advances from Oracle (NasdaqNM:ORCL - News) last year, analysts often cited IBM as a possible white knight. Apparently, IBM would arrive on horseback to rescue the distressed damsel of PeopleSoft. Didn't happen.
When Siebel Systems (NasdaqNM:SEBL - News) fired its Chief Executive Mike Lawrie last month, much analyst chatter ensued that IBM would swoop in to buy the troubled firm. No swooping ensued.
IBM will stick to its plan to battle only in middleware, which includes databases and infrastructure products to manage software integration, says Mills. For applications, he says IBM will continue to partner with outside firms.
"We do not do applications, as it would hurt our ability to partner and build an ecosystem," Mills said. "The question is whether we will complement or compete with our partners."
IBM's strategy is the best way to drive growth for its middleware business and related consulting services, says Richard Petersen, a Pacific Crest Securities analyst. He has a sector-perform rating on IBM stock, which equates to neutral.
Apps vendors that perceive IBM Software as a threat in their backyards would resist partnering with IBM Global Services for lucrative integration work, says Petersen.
Partnering is tough enough for a company with the size and reach of Big Blue. "Being as big as they are, it can be tricky to move around without squashing somebody," Petersen said.
Mills says companies spend some $300 billion on systems integration services each year, compared with $100 billion on applications.
"There is a lot of money circling around applications, and we want to participate in that money around applications (integration)," he said.
For example, Mills cited an agreement unveiled last week between IBM and Lawson (NasdaqNM:LWSN - News), a maker of applications for the service businesses. Lawson said it would only develop its software to run on IBM's WebSphere middleware platform.
"They never would have partnered with IBM if we played in applications," Mills said. "Now, we'll make sales calls together."
The two also will jointly develop products for such service industries as health care, retail and education, says Dean Hager, Lawson's chief product officer.
As a result of the pact, Lawson will cease to make its own application servers and instead bundle its software with IBM's WebSphere application server, says Hager.
"IBM doesn't stutter in stating its software strategy, which is to build middleware components to enable business solutions," he said.
Many analysts, though, still say IBM is interested in acquiring applications firms. For example, an A.G. Edwards analyst mentioned it as a possibility in a recent interview, as did Tier1 Research in a recent report. One reason for the speculation is that IBM has downplayed hardware and moved more into software and services over the past decade, says Wendy Abramowitz of Argus Research.
IBM is wise to play to its strength in middleware, says Abramowitz. She has a buy rating on the stock. "Their approach to partner for applications makes good strategic sense," she said.
Still, software sales growth has been modest. The software unit reported first-quarter sales of $3.6 billion, even with the year-ago figure on a constant currency basis.
Big Blue expects to get most of its future software growth around the rise of open source software and Web services, says Mills. On May 10, IBM said it would buy Gluecode Software, which offers middleware for smaller business clients on an open source platform.
Open source software such as Linux lets developers freely change and improve the software. The Gluecode project is aimed at BEA Systems (NasdaqNM:BEAS - News), an IBM rival in middleware, says Petersen. BEA is strong in selling to smaller businesses.
"IBM can release (it) into the open source community and essentially make the product for free," he said.
At the same time, new Web services let companies easily mix programs over the Internet to create novel processes. IBM is helping its customers design Web services on their computer networks.
This approach will let customers get more out of their software assets, says Mills. "Historically, technology has poured cement over business processes," he said. "Now, the idea is to link new capabilities together in various combinations to serve specific business needs."
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