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IBM Deal Could Spark M&A

The premium paid by IBM for software maker SPSS likely presages richer prices for tech-company deals as the pace of computer industry consolidation picks up.

IBM (IBM) said on July 28 it's paying $1.2 billion in cash for SPSS (SPSS), a maker of data-analysis and statistical software. The deal values SPSS at 42% higher than its July 27 closing price, and 2.6 times its expected sales for this year. "That's a pretty attractive multiple compared with what we've been seeing in the software space," says Jereme LeBlanc, a principal at investment bank TM Capital. The value IBM placed on SPSS could set a precedent for coming tech mergers and acquisitions, he says. "There's no question we're starting to see a thawing in M&A for technology companies."

Corporate boards are freeing more money for acquisitions as the outlook for a recovery improves, while stock prices remain far below historic peaks. IBM also announced on July 28 it paid an undisclosed amount for privately held Ounce Labs, a maker of software that helps companies analyze their programming code for data security risks.

Other Bellwethers Buying IBM's mini buying spree follows a spate of deals by other tech bellwethers. Oracle (ORCL) said July 23 it bought privately held GoldenGate Software for an undisclosed sum, and is closing its $7.4 billion acquisition of Sun Microsystems (JAVA). Intel (INTC) on July 17 closed its $884 million acquisition of embedded-device software maker Wind River Systems.

The SPSS deal reflects the eagerness of big tech companies to expand in the market for data analysis software, an area that's growing even as sales in many other software categories decline. Tech companies are chasing growth through mergers and acquisitions as the recession forces customers to tighten information technology budgets and alternative avenues for growth constrict.

Several software vendors are trying to keep pace with Oracle, which has expanded in markets including business applications, data analysis, and middleware through a string of more than 40 acquisitions since 2005. "The rest of the industry's waking up to the fact that Oracle's right," says Brent Thill, director of software research at Citigroup (C), who predicts tech M&A will pick up further the rest of the year.

Unlocking Value in Existing Systems SPSS, which makes a statistics program well known to generations of grad school students, had nearly $303 million in sales last year. Its products are used in such fields as market research, finance, and sales to analyze data and predict future behavior. Banks rely on SPSS software in detecting fraud, while call centers use it to quickly size up customers' propensity to buy certain products, says Rob Ashe, a general manager in IBM's software group and former CEO of Cognos, a data analysis software company bought by Big Blue in 2007.

Customers are purchasing more data analysis software as they try to extract more value from their computer systems and the information that's housed in them, says Ashe. IBM's software business is highly profitable—margins were 32% in the second quarter amid weaker sales. Data analysis software is IBM's "marquee investment area" and a key to future growth, he says. "Acquisitions have been a very important part of the margin expansion IBM has created."

IBM's offer of $50 a share values SPSS at about 2.6 times its projected 2009 sales, after adjusting for debt and cash, according to analysts. Shares of SPSS rose 41% after the deal was announced, closing up 14.36, at 49.45, on July 28. IBM shares slipped 0.35, or 0.3%, to 117.28.

A Competitive Move Buying SPSS is a competitive move by IBM against SAS Institute, a privately held maker of data analysis software. It also strengthens IBM's hand against Oracle and SAP (SAP), each of which have used deals to expand in business analytics. In 2007, Oracle bought Hyperion Solutions and SAP bought Business Objects.

Judging from the deals announced July 28, the dealmaking in tech is poised to continue, and the prices paid for targets will no doubt keep climbing.
Ricadela is a reporter for Bloomberg News and Bloomberg Businessweek in Frankfurt.

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