IBM to Buy Sterling Commerce for $1.4 Billion

May 25, 2010 Alex Woodie

IBM yesterday announced plans to spend $1.4 billion in cash to buy Sterling Commerce, the AT&T subsidiary that develops B2B communication software and services and logistics applications for retailers and distributors. The deal will put a portion of Sterling’s 18,000 customers that run its Gentran EDI software on i/OS into the hands of IBM, which has its eye on Sterling’s prominent position in the burgeoning market for B2B software and services, including managed file transfer (MFT).

IBM expects the Sterling acquisition to bolster its suite of B2B software and services in the WebSphere catalog, as well as improve its marketplace position as the volume of business transactions conducted over the Internet continues to grow. Sterling claims to manage more than 1 billion transactions every year for its customers in the financial services, retail, manufacturing, communications, and distribution industries–including at least 3,000 companies that ran Sterling’s Gentran EDI translation software on i/OS servers, according to figures provided by the company in 2005. It’s not public knowledge how many i/OS shops are Sterling customers today.

The acquisition nets IBM three major Java-based product suites, including the Sterling Business Integration Suite, the Sterling Selling and Fulfillment Suite, and Sterling Total Payments. Of the three, the Sterling Business Integration Suite, which includes B2B, MFT, and EDI sub-components–as well as on-premise or cloud-based options–has the highest potential for impacting IBM’s offerings and its business.

IBM cites a Gartner study that pegs the total value of business integration software and services at $5 billion per year, which Gartner says is growing 10 percent annually. “This is a growth market and it’s growing faster than the industry,” Craig Hayman, general manager of the WebSphere unit of IBM Software Group, said in a conference call. “This is the right step for both Sterling Commerce and IBM.”

The acquisition of Sterling’s B2B technology will mesh well with other recent IBM acquisitions, Hayman said, including its 2007 acquisition of business intelligence software developer Cognos; its 2008 acquisition of ILOG, a developer of business rules management software for supply chains; and its 2009 acquisition of business process management (BPM) software developer Lombardi.

“You see us providing the analytics across entire supply chains,” Hayman said. “It’s a great and natural fit,” added Sterling CEO Bob Irwin during the conference call. “We fill in each other’s gaps.”

What is perhaps not the greatest fit is the Sterling Selling and Fulfillment Suite, the Java-based logistics application that Sterling introduced about five years ago to compete with supply chain execution software from the likes of Oracle, SAP, and Manhattan Associates. IBM has stated many times over the years its intention to not re-enter the market for application software. The company has divested many application suites over the years, including the MAPICS ERP suite, which was its own company before being acquired by Infor.

IBM says it intends to integrate the Sterling products, as well as 2,500 Sterling employees, into its WebSphere unit. Some components of the Sterling suite will also find their way into IBM Industry Frameworks. The Selling and Fulfillment suite will become part of the WebSphere e-commerce applications, Irwin says.

The deal is subject to customary closing conditions, and is expected to close sometime in the second half of the year. AT&T expects to record a one-time pretax gain of approximately $750 million in the quarter in which the transaction closes.