IBM Shells Out $340 Million for ILOG's Business Rules and Supply Chain Tools

Published: August 4, 2008

by Timothy Prickett Morgan

As we all know, IBM likes to spend big bucks on a sure thing, like over $100 billion in stock buybacks since the mid-1990s, and does not like to shell out what against its scale is a lot of dough for doing acquisitions. That said, IBM is perfectly willing to spend money on fast-rising companies in what it perceives to be hot markets that it can leverage its global scale with to turn them into profit engines. Last week's $340 million acquisition of ILOG, a maker of business rules management, supply chain management, and related applications.

ILOG, in case you have never heard of it, is based in Paris, France, and is a publicly traded company whose shares trade on the Euronext exchange in Europe and the Nasdaq exchange in the United States. ILOG was founded in 1987 and created software modules in Lisp and then C++ that it sold to application developers to help them code chunks of their own applications. In the 1990s, when the client/server revolution was under way, the company sold its products, of which the current JRules and JViews are the successor products, mostly in Europe but gradually expanded into North America. The company got into the supply chain area after it raised cash from its initial public offering in 1997 when it bought a company called CPLEX Optimization, which was based in the States, and ported its tools to the Java platform as that programming language and runtime took of in enterprises. The company's tools now also support C#, Microsoft's Java-alike kicker to C++ that runs in the .NET environment on Windows boxes. Since 1998, application software maker SAP has been an investor in ILOG and is reportedly the company's largest customer. In April 2007, ILOG bought one of its own customers, LogicTools, a maker of supply chain applications focused on inventory optimization. The company currently has 50 channel partners of its own and around 850 employees.

ILOG just completed its fourth quarter and fiscal 2008 year, and the company, which has dual headquarters in Gentilly, France (outside Paris), and Sunnyvale, California, reported sales of $46.1 million, down a smidgen in dollars, but in European currency, where ILOG still does a lot of its business and has a lot of its costs, sales only came in at €29.6 million, down 14 percent. (You can see now why ILOG wants to count in dollars, and why IBM will want to as well.) For the quarter, ILOG had $20.1 million in software license sales, down 8.6 percent in dollars (and much worse in euros) with maintenance sales of $13.9 million (up 12.6 percent) and professional services sales of $12.2 million (basically flat). The company had a net income of $79,000, a big swing from the $1.9 million net income in the year ago quarter. For the year, ILOG had just under $181 million in sales, up 12.1 percent in dollars (and flat in euros) and managed to only bring $519,000 to the bottom line for the whole year.

Given these financials and the fact that ILOG had a market capitalization of around $150 million when IBM proposed the acquisition last week, you might be asking yourself why IBM would pay $340 million for ILOG. Well, for one thing, ILOG has $74 million in cash in the bank. So that helps cushion the cost a little. Moreover, ILOG doubled in size over the six years between fiscal 2003 and fiscal 2008 and was decently profitable in 2005, 2006, and 2007, and was profitable in the five years running from 2003 through 2007. The crash in the dollar has been a big problem for ILOG in recent years--and a company with IBM's breadth, depth, and reach can help with that. IBM also has a lot of sway with one of ILOG's largest set of customers: financial services companies. And as we all know, these companies have been hurting badly in recent quarters because of self-inflicted wounds and other financial follies.

The ILOG acquisition is being pitched by Big Blue as a means of extending the company's leadership in services oriented architecture (SOA) tools, but this is equally about selling full-blown applications and tools that companies use to directly manage their businesses. Look at the numbers. ILOG sports some 465 ISVs using its tools and over 2,500 end user companies worldwide who do the same, including those various supply chain optimization tools. This deal is also about tightening Software Group's ties to application software vendors, one of whom--and maybe even SAP--might have been thinking about acquiring ILOG itself.

IBM is buying up the shares in what is called a cash tender offer, and already had commitments from key shareholders to buy their shares representing 10 percent of the total shares outstanding before it announced the deal last Monday. IBM needs to get its hands on 66.67 percent of the shares for the deal to go through. Shares will be acquired on the Euronext market at €10 a pop and converted to the U.S. dollar rate when the shares are tendered on the Nasdaq. In euros, the deal is worth about €215 million. ILOG's board of directors has approved the deal, and IBM did not say when it anticipated the deal to close. There are a bunch of regulatory hurdles the two companies have to jump through first, and there is always a possibility that someone else could swoop in and try to steal the company away.

As we go to press with this story, Wall Street was only pegging ILOG's value at $221 million on Tuesday last week, and it is hard to say how investors are reacting to the deal. During the heydays of the dot-com boom in 1999 and 2000, ILOG peaked with a market cap that was north of $1.5 billion, and after crashing down to lows of a few bucks a share in late 2002, during the IT recession, ILOG fought back to get its shares around $20 a pop in late 2005 and early 2006. But since then, they have been drifting lower. It looks to me like investors are tired and they would probably like to have some IBM shares, which have risen by 30 percent since January and which will probably rise some more if IBM hits its ambitious financial goals in 2008 and 2009. If this deal closes, they will have some money to invest in Big Blue--or perhaps in oil futures or maybe even in land some place where the sun shines strong and the wind blows hard.

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