IBM May Need Multibillion-Dollar Deal to Jump-Start Sales

International Business Machines Corp.’s plan to spend almost $15 billion on deals through 2015 is turning NetApp Inc. and Splunk Inc. into takeover candidates.

IBM finds itself looking for deals after sales increased just 0.8 percent in four years, the worst rate since the period that ended in 2002, according to data compiled by Bloomberg. Investors have taken notice, with its shares lagging behind those of rivals Oracle Corp. and SAP AG by the most in at least nine years in 2012, the data show.

The company, with a market value of $232 billion, has identified areas for expansion through the end of 2015. Sterne Agee & Leach Inc. sees NetApp, which has almost doubled revenue since 2008, strengthening IBM’s standing in cloud storage. Splunk, which has rallied almost twofold since its initial public offering last year, would help IBM meet a goal of growing in data analytics, according to Credit Agricole SA. Royal Bank of Canada says Imperva Inc. would bolster its position in security products.

“It’ll probably be a surprise acquisition that will really get things going,” Laurence Balter, an analyst with Oracle Investment Research in Fox Island, Washington, said in a telephone interview. “Unless IBM does something real interesting, an acquisition down the road or something that will stir up growth, we’re at a little bit of a plateau.”

Biggest Deals

James Sciales, a spokesman for Armonk, New York-based IBM, said the company doesn’t comment on potential acquisition targets. NetApp’s Roger Villareal, Splunk’s Ken Tinsley and Imperva’s Rob Rachwald also declined to comment.

IBM shares rose 1 percent to $205.18 today, closing at the highest price in more than three months. NetApp climbed 0.7 percent to $36.25, Splunk rallied 2.9 percent to $33.90, and Imperva added 2 percent to $35.

IBM has faced pressure for years to expand through deals, with investors saying in 2010 that profit growth hinged on doing a multibillion-dollar acquisition. The company managed to increase net income to $16.6 billion last year, up 12 percent from $14.8 billion in 2010, even without announcing any transactions that eclipsed its two biggest: the 2008 purchase of Cognos Inc. for $4.5 billion and the $3.9 billion deal for PricewaterhouseCoopers LLP’s consulting business in 2002. Both figures include net debt.

The company’s preference is to strike deals valued at $200 million to $1.5 billion, Chief Financial Officer Mark Loughridge said in May. “We are not looking at big acquisitions, nor do we want to communicate that we’re looking at big acquisitions,” he said during the presentation at a conference.

‘Larger Scale’

To make a difference in IBM’s revenue, which totaled $104.5 billion last year, up just 0.8 percent since 2008, the company may have to consider bigger transactions, said Joe Foresi, a Boston-based analyst at Janney Montgomery Scott LLC.

“Clearly, given the size of the company, acquisitions will have to be on a larger scale,” he said in a phone interview.

IBM has a goal of doing $20 billion of deals from the start of 2011 through the end of 2015. Counting already announced transactions, IBM has $14.5 billion left to spend. IBM completed 11 purchases in 2012, including five in data analysis and two in cloud computing, according to the company. It bought Worklight Inc. for mobile tools and spent $1.2 billion including net cash on Kenexa Corp. to add social business capabilities.

Takeover Speculation

Splunk, a $3.3 billion company based in San Francisco, could help IBM grab a larger slice of the global market for analyzing large, complex databases that should reach $48.3 billion by 2018, up from $6.3 billion in 2012, according to Transparency Market Research. Splunk also has intellectual property for data analysis that would be valuable to IBM, said Edward Maguire, a New York-based analyst at Credit Agricole.

Splunk’s shares rose 6.9 percent on Jan. 15 amid speculation it could be bought by IBM or Oracle, according to Brian White, an analyst at Topeka Capital Markets Inc.

“Buying Splunk makes sense from a products perspective, because Splunk is a gigantic analytics engine,” Peter Goldmacher, a San Francisco-based analyst at Cowen Group Inc., said in a phone interview. “It can take data from data centers or cars or planes, and that’s what IBM is all about.”

Analysts estimate Splunk’s sales increased 60 percent in the fiscal year that ended in January, according to the average of projections compiled by Bloomberg. It went public in April and has since rallied 94 percent.

IBM today said it’s buying Star Analytics Inc. for an undisclosed amount. The Redwood City, California-based company integrates business information and helps sort out what’s important, eliminating time-consuming steps for data analysis.

‘Weak Areas’

NetApp, valued at $13 billion, has been speculated as an IBM target for years, said Shaw Wu, a San Francisco-based analyst at Sterne Agee & Leach. The computer-storage company would bolster IBM’s cloud-computing plans, he said.

“Storage is definitely one of the weak areas for the company,” Wu said in a phone interview. “For them to get stronger there would make sense.”

The analyst said IBM may have to pay a 30 percent to 100 percent premium for NetApp, which at current prices would exceed the $14.5 billion left in IBM’s projected takeover budget.

Adding Imperva, valued at $842 million, would help IBM’s customers better protect applications and data, particularly information on remote servers referred to as the cloud, said Amit Daryanani, a San Francisco-based analyst at RBC.

Juniper, Akamai

Sales at the Redwood Shores, California-based company rose 30 percent in 2012, according to the average of analysts’ forecasts compiled by Bloomberg. Imperva’s software for managing databases, files, Web applications, servers and hardware appliances is used by more than 2,000 customers -- including top telecommunications providers, U.S. banks and government agencies -- in over 60 countries.

Sterne Agee’s Wu said that a purchase of Juniper Networks Inc. would add higher-margin hardware, helping IBM compete with Cisco Systems Inc., while adding security capabilities. Akamai Technologies Inc. would bolster IBM’s cloud plans, he said.

Juniper’s Cindy Ta and Akamai’s Rob Morton declined to comment.

Today, shares of Juniper declined 0.3 percent to $22.32. Akamai rallied 2.7 percent, the most in a month, to $41.81.

IBM rallied 4.4 percent on Jan. 23, the most in a year, after the world’s biggest computer-services provider forecast profit that exceeded analysts’ estimates. Last year, shares of Redwood City, California-based Oracle rallied 30 percent, versus IBM’s 4.2 percent gain, while SAP of Walldorf, Germany, rose 49 percent. Oracle won by the most since 1999, while SAP last outperformed IBM by that amount in 2003.

“They’re probably aware that the absence of top-line growth hurts the stock price,” David Grossman, a San Francisco-based analyst at Stifel Financial Corp., said in a phone interview. “They’re constantly evolving their strategy.”

Before it's here, it's on the Bloomberg Terminal.