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IBM Announces Plans to Acquire Cognos

November 12, 2007

As implausible as it may seem, IBM is feeling the competitive crunch and is take drastic steps to keep pace with its major rivals. The company has announced that it intends to acquire Cognos Inc. for nearly $5 billion in an effort to maintain a strong presence in the business-intelligence software market.


Such an acquisition could be considered par for the course in the market this year as SAP agreed to pay $7 billion last month for Business Objects SA, which had bought Cartesis and ALG Software. Oracle Corp. snagged Hyperion Solutions Corp. for $3.3 billion in March.

Cognos made an acquisition of its own when it bought the much smaller performance management software vendor Applix earlier this year. Cognos shareholders are likely smiling as shares soared recently with expectations that it would be acquired.

Steve Mills, head of IBM’s software group – which had a previous business partnership with IBM – claimed that these previous deals did not provide inspiration for this move. Instead, he noted that IBM has been in acquisition mode in recent years in an attempt to build out its software portfolio and improve the company’s overall profit margins. 

The deal values Cognos shares at $58 each, a 9.5 percent premium to Friday’s closing price. By comparison, the company’s shares were trading in the mid-$40s before SAP’s $7 billion proposal for Business Objects was announced in October.

When measuring sales, software is the smallest of IMB’s three main lines of business, although it is by far the biggest driver of profit growth. The company’s services division has significantly narrow profit margins and its core hardware unit is struggling with weak sales growth.

This move to purchase Cognos is expected to be a big blow to IBM rival Hewlett-Packard, which offers a business intelligence and data warehousing platform built using products from Cognos.

IBM plans to integrate Cognos into its Information Management Software division when the deal closes. This is expected to happen in the first quarter of 2008, subject to regulatory approvals and other closing conditions.

Cognos currently employs roughly 4,000 people and serves more than 25,000 customers. IBM plans to integrate Cognos within its information software division. The business will still be led by Cognos CEO Rob Ashe, although the company declined to say how many of Cognos employees will have a job upon closing.

IBM’s plan to grow out its profit-driving division is not likely to stop with the acquisition of Cognos. We should expect to see strategic moves from HP and other competitors in an effort to better align themselves in the market against IBM. With the expectation of future consolidations, one has to wonder how much benefit the customer will receive in the end.

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Susan J. Campbell is a contributing editor for TMC and has also written for eastbiz.com. To see more of her articles, please visit Susan J. Campbell’s columnist page.

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