IBM Is Planning Mid-Sized Acquisitions to Fuel Growth in Software Business

By Aaron Ricadela - Oct 4, 2011 7:55 AM GMT+0700

International Business Machines Corp. (IBM) plans 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 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,” Mills said. “No spurious, off-to-the-side, unrelated things.”

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

“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.”

‘Bored With the Stock’

IBM 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.”

“IBM’s done about everything it can to maximize their operating model,” he also said.

Shares of IBM fell $1.58 or less than one percent, to $173.29 today on the New York Stock Exchange. The shares have gained 18 percent this year.

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