IBM Acquires BI Software Specialist Cognos for $5 Billion

Published: November 19, 2007

by Timothy Prickett Morgan

The third shoe in the business intelligence market has finally fallen, now that IBM last week announced that it would spend $5 billion in cash to acquire Canadian BI software maker Cognos. The IBM deal follows Oracle's snapping up of Hyperion Solutions in March for $3.3 billion and SAP's purchase of Business Objects in October for $6.7 billion. With this deal, the three biggest independent suppliers of business intelligence and analytics software are no longer free agents, no matter how much their new owners will protest otherwise.

IBM has long had high hopes for data warehousing and its more sophisticated second act, business intelligence, in driving hardware, software, and services sales at the computer giant. And as it has done in other areas, Big Blue has relied on partnerships with data warehousing and BI software players to serve its 500,000 global customers. At some point in every market segment in which it plays--and in which it sees someone else getting juicy profits--IBM has made a decision to acquire a major player to get integration and sales synergies as well as to directly boost its software revenues and profits. This happened with Lotus and its groupware in 1995 and it happened today with Cognos, just to cite two examples. And in the case of Cognos, it was only a matter of time before someone--maybe Hewlett-Packard or Sun Microsystems, two venerable hardware makers with software aspirations and lots of cash, or maybe Microsoft, which has more cash than God--would swoop in an buy Cognos. While IBM will continue to support software from Cognos on other databases and server platforms--it has little choice, just as SAP and Oracle will have to do the same with similar tools from their new Business Objects and Hyperion units--there is no question that IBM wants to have a complete stack of tools in its Information Management division in its Software Group so it can boast of one-stop shopping and integration as much as it can peddle a best-of-breed, a la carte approach through its many partnerships and the skills of its Global Services division. IBM's Software Group has done 23 acquisitions in the past dozen years, including Cognos, relating to its "information on demand" strategy, which was launched in early 2006. The Cognos buy is the largest deal that IBM has done in terms of dollars; adjusting for inflation, the $4.5 billion Lotus deal from 1995 was bigger, though.

Cognos and IBM have been partners for the past 15 years, but the Canadian software firm is much older, having been established in 1969 at the beginning of the first wave of widespread commercialization of mainframes. Rob Ashe, the company's president and chief executive officer, joined Cognos in 1984 and steered the firm's growth and its public offerings on the Toronto Stock Exchange in 1986 and on the NASDAQ National Market in 1987. The company currently has more than 3,700 employees and over 25,000 customers worldwide; it is headquartered in Ottawa, Ontario, but has a U.S. headquarters in Burlington, Massachusetts--where IBM has coincidentally is building a new software lab. By virtue of its own Toronto software labs (where its databases and related transaction processing and middleware is also made) as well as its recent acquisition of high availability and data transformation software maker DataMirror, which was based outside of Toronto as well.

In a conference call announcing the deal, Ashe said that Cognos was not looking to be acquired when IBM approached it several months ago. "When this all began, the company was not for sale," Ashe explained, adding that the company was not doing a deal with IBM because of "fear" or a "change in the landscape" in the BI software market.

Very few people will believe this. Once Oracle bought Hyperion in March, it was inevitable that other major IT players who want to steady sales and profits that software can deliver, would start chasing Business Objects, Cognos, and SPSS. Once SAP shelled out so much cash for Business Objects, which is the largest of the for BI software vendors, there is no question that there was pressure for Cognos to find a big player to ally itself with. The fact that IBM only had to pay a 9.5 percent premium for Cognos shows just how eager it was to do the deal.

That $5 billion in cash is still a pretty hefty premium compared to sales and profits, however. In its fiscal 2007 year ended in February, Cognos had sales of $979.3 million (up 11.6 percent), and brought $115.7 million to the bottom line (up 6.6 percent). Five years ago, the company had $550 million in sales, and brought a proportionately larger piece of that down to the bottom line, at $73.1 million. It has been harder for Cognos to extract profits out of a growing BI market, which is valued at more than $6 billion annually by IDC. It is safe to say that Cognos needs IBM as much as IBM needs Cognos at this point, and Big Blue is not so much lucky that is has no product overlap in this space as much as it simply doesn't have its own software product lines in the BI software space.

Ambuj Goyal, general manager of IBM's Information Management unit and the IBMer who negotiated with Ashe on the deal for the past two months, will be Ashe's new boss when the Cognos deal is done, probably sometime in the first quarter of 2008. Goyal said that there would be no layoffs. "This is about growth and expansion," Goyal explained. "When we acquire companies, we try to double them in two to three years." This is not something that Cognos has been able to do by itself, although it was set to double its sales in about six years, which is not too shabby.

Steve Mills, general manager of IBM's Software Group, said that IBM had every intention of staying in Canada, and said that IBM's acquisition of yet another application software provider did not signal any change in IBM's strategy of partnering with other software providers to drive sales of hardware, software, and services. "We haven't changed our strategy in any fundamental way," he said. "We have applications in our portfolio today." He added that the kinds of applications that IBM sells directly tend to be horizontal ones, like groupware, document processing, enterprise content management, and now business intelligence.

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