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IBM Targets Mid-Sized Acquisitions to Fuel Growth in Software

International Business Machines Corp. (IBM) is planning more acquisitions to fuel growth in its $22.5 billion software business, Senior Vice President Steve Mills said in an interview.

IBM, which last week surpassed Microsoft Corp. (MSFT) to become the world’s second-most valuable technology company, after Apple Inc. (AAPL), may spend $100 million to $300 million on targets, the Armonk, New York-based company said.

Chief Executive Officer Sam Palmisano has said he’s seeking $20 billion in additional annual revenue by 2015. The company aims to double or triple the pace of sales growth at companies it acquires and looks for deals that will add to earnings within two or three years, Mills said.

“Everything’s got to fit,” he said. “No spurious, off- to-the-side, unrelated things.”

IBM generated $99.9 billion in sales last year. Software, which had gross margins of 86.9 percent last year, is key to IBM’s growth plans.

The company has made almost 50 software acquisitions since 2006 in such areas as data analysis, e-commerce, supply-chain management and computer security, Mills said. More than half of those have been in business-data analysis, where IBM says it has spent $14 billion. The company expects those business-analytics products to yield $16 billion in sales by 2015.

‘Hell of a Job’

“They’ve done a hell of a job,” said Joel Achramowicz, an analyst at Blaylock Robert Van LLC, an investment bank in Oakland, California. IBM is “making the right acquisitions at the right time.”

The company today said it agreed to buy closely held Q1 Labs, a Waltham, Massachusetts-based provider of security intelligence software, for undisclosed terms. It also created a new security systems division, to target the $94 billion market for security software and services.

IBM fell $1.30 to $171.99 at 9:38 a.m. in New York Stock Exchange composite trading. The shares had gained 18 percent this year before today.

The company is unlikely to make large acquisitions, worth $10 billion or more, Achramowicz said. He said he dropped coverage of IBM in April partly because of the company’s unwillingness to take on a very large deal.

“That’s one of the reasons we got kind of bored with the stock,” he said. “There are some big software companies out there, which could augment IBM’s position.”

In terms of the existing business, “IBM’s done about everything it can to maximize their operating model,” he said.

SPSS, Cognos

Mills said the company looks for deals that can augment products it already owns. For example, the statistical-analysis software company SPSS Inc., which IBM bought in 2009 for about $1.2 billion, complements the company’s 2007 acquisition of Cognos Inc., whose software creates executive “dashboards” for quickly perusing business data.

SPSS lends Cognos more robust statistics capabilities, and Cognos helps SPSS users visually depict their data, he said. That’s accelerated SPPS’s growth since IBM bought it, Mills said.

“When you do that, you know you’re going to get a lift,” he said.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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