KUHN CAPITAL Monday, March 19, 2018
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IBM Gets Rational


In IBM's largest software acquisition ever, the company announced today the purchase of software development platform specialists Rational for $2.1 billion.

The deal is significant on many fronts:

First, itís a much larger acquisition than many analysts predicted would occur for several years in the current frigid market. The announcement comes a little over a month after the Borland acquisition of TogetherSoft, though the development-focused deal pales in size comparison at a paltry $185 Million.

Second, for IBM, it adds critical development and testing capabilities to their toolset. Rational claims to be used by 98% of Fortune 100 companies in their development efforts. By taking advantage of Rationalís market prevalence and formalizing a partnership thatís been getting closer since 1999, the company hopes to develop a one-stop shop for developers. In this case ďone-stopĒ means the addition of support for Microsoftís .Net intitiatives, a space the company was understandably reticent to enter.

Third, reaching a meeting of minds between IBM and Rationale required the crossing of a large vaulation gap. From one perspective, the deal was dear indeed: 6.5 times Rational sales. From another perspective, it was cheap: done for a per share price of $10.50 when that stock traded at $25 as recently as last January.

We like the implication that buyers may be concluding that prices won't likely decline further, while sellers are simulaneously concluding that value won't be returning to even last year's levels any time soon. That circumstance impies greater deal volume ahead.

IBM intends to merge Rational's business operations and employees into the IBM Software Group as a new division and fifth brand, joining WebSphere, Lotus, Tivoli and DB2.

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