News: Analysis & Commentary: DEALS
GERSTNER AT THE GATES
IBM's hostile bid for Lotus signals its resolve to take on Microsoft Lou Gerstner hates it when he hears people call Microsoft the world's largest software company. It gnaws at him. The fact is, IBM sells $11 billion worth of software a year--more than twice Microsoft's revenues.
The world won't likely slight IBM again if Gerstner pulls off his surprise $3.3 billion cash offer, announced on June 5, for Lotus Development Corp. The bid--Big Blue's first-ever hostile takeover attempt--would not just be the biggest deal in the history of software: It also has the potential finally to make IBM a serious challenger to Microsoft Corp., which owns a staggering 80% of the market for the operating systems and applications suites that run on personal computers.
How? The acquisition could allow IBM to seize the lead in the new era of networked computing. Right off the bat, IBM would get Lotus' cc:Mail and Notes, the top-selling packages for electronic-mail and groupware. More important, IBM has the marketing muscle, financial resources, and technology knowhow to make Notes a widespread "platform" for building networked information systems. "There's an opportunity for leadership in the combined entity," says Gerstner.
SORRY STATE. Just ask Bill Gates. "It's fascinating," says the Microsoft chairman, who, like just about everybody else, was stunned by the boldness of the IBM move. But he warns: "It really has a lot to do with execution." On news of the bid, Gates assembled a six-person task force to study the impact of an IBM-Lotus combination on Microsoft.
The acquisition plan was hatched after a series of internal task forces at IBM had summed up the sorry state of the company's software efforts. The assessment was grim: IBM, with thousands of programmers around the world, still had no significant presence in desktop software. It had failed to perfect a groupware product, and Microsoft was poised to make a major push into networking with its new Windows 95 operating system and a Notes-like package called Exchange. John M. Thompson, the senior vice-president Gerstner had asked to straighten out software operations in January, concluded that the fastest route into network software would be buying Lotus.
The two companies have a long history of marketing and development arrangements, primarily involving Notes and OS/2, the IBM operating system. As recently as last summer, Lotus CEO Jim P. Manzi was discussing a number of possible arrangements with James A. Cannavino, IBM's former chief strategist--including a proposal by Manzi for IBM to buy Lotus' declining desktop software business, which includes the 1-2-3 spreadsheet line.
Manzi, though, rebuffed Thompson's suggestions, starting early this year, that IBM acquire all of Lotus. By the spring, the testy relationship between the two companies had grown strained--and IBM had begun exploring alternatives. In mid-May, say executives familiar with the company's plans, IBM was ready to strike a deal with a small software maker called Attachmate Corp., which sells a Notes-like product called Open Mind, and to buy Star Division, a tiny German company that sells a suite of desktop software applications.
"A RIP-ROARING SUCCESS." Even as IBM negotiated these deals, top executives questioned whether they would suffice. In late May, Gerstner made the call: Go after Lotus--with or without Manzi. Analysts say Gerstner's instincts are dead-on. They point out that the deal could represent the last best chance for both companies to keep Microsoft from dominating networked computing the way it rules in desktop PCs. Indeed, as the center of gravity shifts from desktop PCs to the network, operating systems such as Windows may no longer be the key strategic technology. "Network-centric computing has little to do with Windows," says Cannavino, who retired at the end of March.
That's what Manzi has been saying all along. But Lotus hasn't had the organization or the might to make Notes the Windows of networked computing. That's where IBM can help. Gerstner figures IBM can establish Notes as a ubiquitous software platform. The quickest route would be to persuade PC makers to ship Notes with every machine they sell, and Gerstner has hinted he may bundle Notes with IBM PCs. Meanwhile, IBM insiders figure they can push Notes sales to $1 billion next year, up 40% from what analysts project Lotus will do in 1995. Equally important, IBM has the expertise to beef up Notes so it can serve hundreds of thousands of users on a network.
Still, as Gates points out, it will all be in the execution. "They have an $11 billion software business they can't run. They're going to run Lotus better? Get out of here," says Marc Butlein, chairman of Meta Group, a computer consulting firm. Nobody is more aware of IBM's shortcomings than Gerstner. So, in a memo sent over the Internet to Lotus employees, Gerstner promised that, postmerger, Lotus will survive intact and become the hub of a new IBM PC software operation. Notes developer Raymond E. Ozzie already sounds like a convert: "I've spent 10 years of my life nurturing this product," he says. "We have a goliath coming into the market with Microsoft. I want to do everything I can to make sure that Notes is a rip-roaring success."
Gerstner has more at stake than his $3.3 billion. For more than a year, he has been telling analysts and customers that the future of the company depends in large measure on its ability to lead in network computing. Notes would help make that happen. Prior to June 5, IBM had been negotiating with Lotus to run Notes on the IBM Global Network, which carries data for 25,000 corporate customers, for example.
With $10.5 billion in cash and a stock that has doubled in the past two years, Gerstner may not stop his shopping with Lotus. Insiders say IBM could make a play for network operating-system maker Novell Inc. or database maker Informix Corp. Gerstner declines to comment on additional acquisitions but stops short of ruling them out. "Right now we are focusing on this one," he told reporters on June 5.
Manzi may be the only real obstacle to the deal. "It comes down to the ego of [Lotus'] top execs," says John McCarthy, an analyst with Forrester Research Inc. "They don't want to be labeled as selling out to IBM." Lotus executives aren't talking about IBM's bid, but their options appear limited. The most obvious white knights--AT&T, Oracle, and Hewlett-Packard--all are unlikely to top IBM's $60-per-share offer. The best Manzi can do, analysts expect, is to bump Big Blue's bid up to $65 or $70 per share by threatening to exercise Lotus' poison pill, which IBM is suing to dismantle. Beyond that, "it's basically done," says Paul Johnson, an analyst at Robertson Stephens Inc. "It's a matter of price and timing." Lotus' directors, whom IBM is seeking to oust, must meet by June 15 to discuss their options. Most likely, they will agree to usher their company, with IBM, to the forefront of software's new era.
Software's New Playing Field?
How IBM's and Microsoft's operations would stack up
ON THE DESKTOP...
-- Its OS/2 operating system, launched seven years ago, isn't in the same league as Microsoft's Windows. And IBM's few applications never caught on. Lotus would give IBM a presence in applications--particularly with Lotus 1-2-3.
-- Lotus' Notes is the key. The groupware package has a huge lead over competitors' products and would fill a hole in Big Blue's product line. Lotus also brings cc:Mail, the leading electronic-mail product.
-- The company is the entrenched leader in mainframe and minicomputer software for running corporatewide systems. The challenge: Moving that "mission-critical" software onto the PC-based networks that are replacing bigger machines.
ON THE DESKTOP...
-- With 70 million users, Windows dominates the operating-system market-and its base is growing. Thanks to its Excel spreadsheet and word processing package, Word, Microsoft also is the biggest player in applications software.
-- Its Windows NT, for networks of personal computers, is gaining market acceptance. But Exchange, a Notes competitor that likely won't appear until next year, has hit repeated snags.
-- The king of PC software hopes to push NT and related programs into IBM's big-system turf. This summer, it will introduce Microsoft Network, an online information and communications service that will compete with IBM's Prodigy.By Amy Cortese and Ira Sager in New York, with bureau reports