In a much anticipated move, IBM announced that it is acquiring Cognos (COGN) for $5 billion or approximately $58/share. IBM has been aggressively expanding its software portfolio to the point where it makes more profit from software than from its services and hardware businesses.

Why buy?

Oracle (ORCL) and SAP (SAP), IBM’s rivals, spent $10 billion collectively during the last year to buy a couple of the top independent BI firms, Hyperion Solutions and Business Objects, i.e. Cognos rivals. Is this just IBM trying to match their rivals’ moves? Certainly that is part of the rationale since rivals copy each other all the time in all industries including acquisitions and divestitures.

Although rivalries may have pushed IBM to finally pull the trigger on the acquisition, the business intelligence (BI) software market is large enough at $6.3 billion sales last year according to IDC and growing at 12% annually to get IBM’s attention. And Cognos was the largest available independent public BI pure-play earning $116 million on $979 million in revenue in its recent fiscal year. IBM’s 10,000 person sales force will have no problem boosting Cognos sales just as the have done for most of IBM’s recent acquisitions.

Why sell?

After the acquisition of Business Objects, Cognos talked a lot about them being the largest independent pure-play and how that what customers preferred. They cited Goldman Sachs research that found that 60% of CIOs preferred to buy their BI software from independent BI vendors rather than from database or application vendors. But what changed their minds? $$$ The purchase price represents a 49% gain over the last three months based substantially on takeover speculation. Although independent pure-play BI firms have been posting very good quarterly results over the last year or so a lot of their stock gains over that period were due to collective speculation, which was confirmed, about acquisitions.

What is the impact?

What are the impacts or repercussions of the acquisition?

Investors:

Already noted, very positive.

Cognos Customers:

IBM plans to retain the brand name but it will become part of the to IBM’s Information Management division. In the short run, there should be minimal impact to Cognos’ customers other than maybe an IBM sales person calling on them. The conventional wisdom is that there is very little overlap (we’ll discuss that shortly) so customers do not have to wait for product roadmaps to appear to see if their favorite product is being retained or figure out how much migration is being forced on them. IBM is terrific at maintaining and enhancing legacy products (I am not saying Cognos is in that category, but worse case scenario), just look at their mainframe business and what they have done with Informix since purchasing it.

However, let’s poke a couple of holes in the “business as usual” proclamations. First, every software acquisition, no matter how friendly and how well all the products mesh together, involve a significant amount of inward focus (internal politics) with such trivial decisions like who becomes the managers, who works with whom and who has a job. The companies always say the acquisition is about the customers but the reality is employees have to figure out their jobs first.

Second, there is a fundamental product overlap in the OLAP technology products that IBM now has in its BI portfolio. DB2 OLAP (from its AlphaBox acquisition), Cognos PowerPlay (its bedrock product), Cognos Now! (from Celequest) and TM1 (from Applix). IBM will probably support all of them for years to come but which product(s) will be considered strategic? Which ones will be used for any applications that IBM builds or within other product lines? IBM could say they are all strategic, but that’s like everyone saying their children are above average – they all can’t be. PowerCubes are a little long-in-the-tooth technology-wise but very popular, i.g. they are the major reason Cognos approached $1B in sales.

IBM Customers and Prospects:

Your friendly IBM sales person has more products to pull out of his bag. (Sort of like Santa at the beginning of his travels!) It’s getting harder and harder for an IT or business person to find out, let alone understand what IBM sells without a playbook (the website has a lot of high-level market talk and then you start downloading encyclopedia of product materials!) No wonder there are 10,000 sales people.

Cognos Employees:

You should not expect massive layoffs but there might be a few extra people in marketing, sales and administration across IBM. Even without any layoffs there will be attrition, and that inward focus and scramble mentioned above. Also, how about those people who were recently acquired by Cognos and are now in IBM?

Conclusion

Andreas Bitterer, VP of research at Gartner, said “This is the end of business intelligence as we know it.” It sounds ominous; we’ll discuss the market impact in our next post.  I’d prefer “It’s the End of the World as We Know It (And I Feel Fine)"