IBM’s Sea Change

When IBM chief executive Sam Palmisano said earlier this year that he would “go on the offensive” against the global recession, he wasn’t kidding. Big Blue this week announced its intent to acquire data analytics specialist SPSS for the large-ish price tag of $1.2 billion, in an effort to follow companies’ recession-era spending priorities. But the whopper acquisition of SPSS also amounts to a sea change in the competitive landscape – one that could touch of a new round of ISV M&A activity.

There’s certainly a data-analytics need in the market. In fact, it’s one of the few areas where corporations are continuing to spend on software licenses: IDC predicts the worldwide market for business analytics software to swell to $25 billion this year – up 4 percent.

The idea behind data analytics and business intelligence is to allow companies to not only better understand the demographics of the population they serve, but also be able to forecast future trends and monitor shifts in consumer behavior through advanced data capture, data mining and statistical analysis. The tools in theory give their users the ability to cut costs, boost profitability through margin analysis and employ predictive analytics: For instance, banks use SPSS for fraud detection, and retail stores use it to target marketing campaigns. It all translates to competitive advantage, an invaluable quality in recessionary times.

“Companies are right now struggling with the sheer volume of information that they have to analyze,” said Inhi Cho Suh, vice president of strategy in information management at IBM, in a televised interview with Fox Business. “And every organization across every industry is trying to tackle that better, to drive business performance and business results.”

Risk vs. Reward

Perhaps that overwhelming need by businesses to unlock the value in company databases is all the justification IBM needs for paying a 42 percent premium above Chicago-based SPSS' closing price of $35.09 on Monday. The all-cash deal, if approved, will pay out $50 a share. That’s 2.6 times the expected sales for 2009 for SPSS, which had about $303 million in sales last year.

Is the market need enough to justify the price tag?

Maybe. Industry watchers say that acquisitions are on the upswing, and for now, deals like this might not be as overvalued as they seem at first sight, considering that stock prices remain much lower than they should be.

Also, with IBM’s resources behind it, SPSS now has the potential to grow into a bigger revenue generator than it has been and essentially, pay for itself. Though SPSS employs 1,200 people in 60 countries, it had reached max capacity given its resources. SPSS Chairman, CEO and President Jack Noonan thus calls the deal a “transformational event” that will sharply bump up adoption of its technology and ability to expand its sales reach.

The deal also prepares IBM for a world where growth in more traditional business software licensing is flat and hardware a commodity business. For IBM, such investment bolsters the strength in its software business, which boasted a 32 percent profit margin in the second quarter despite weaker sales. Now, the computing behemoth expects to now drive double-digit growth through the business intelligence segment, which incidentally has even higher margins than other software-and-services lines of business. Biz intel, in short, has become a top priority for investment, the company said.