At first, Steve Solazzo says, he was puzzled. He had a big job, running
IBM Corp.'s
multibillion-dollar Linux operations, which he launched in 2000. But
IBM's top software executive, Steve Mills, had chosen him to lead the
integration of soon-to-be-acquired Rational Software Corp. Any
puzzlement quickly faded, though, in the course of a conversation with
IBM chairman Sam Palmisano. "Not only did Sam invite me in and spend 45
minutes of his day convincing me that this was the right thing for me
to do," Solazzo says, "he also really positioned how important the
Rational acquisition was in the context of IBM's strategy." Palmisano
went on to meet monthly with Solazzo and his integration team to review
their progress on the $2.1 billion deal, which closed in February 2003.
"He was into this," Solazzo says.
In fact, a lot of IBMers were into the Rational acquisition.
Besides Mills, Solazzo and Palmisano (and, of course, the board of
directors), the roster of players included the software group's
strategy and business development teams; the corporate-level deal
committee, which reviews and approves transactions; and the corporate
development team led by Dave Johnson, who coordinates the deal
committee's work and serves on it along with his boss, CFO John Joyce,
and other senior corporate executives. Johnson's team worked closely
with the software group to negotiate and structure the transaction and
later helped Solazzo apply IBM's integration expertise - and get ready
for those meetings with Palmisano.
All this teamwork produced two important results. One was the swift
addition of a fifth division to IBM's software group, with Rational
veteran Mike Devlin in charge and nearly all of Rational's talent still
on board. The other was a fresh volume for IBM's library of acquisition
experience, a body of knowledge that the software group, IBM's most
acquisitive unit, has done much to create. Still growing fast after
bringing in $14.3 billion in revenue last year, the group has made some
30 acquisitions over the past decade, including three of its five
divisions. "Along the way, you always tend to make some mistakes," says
Mills, who worked in software even before the group's formal inception
in 1995 and who has run the unit since 2000. "The idea is to collect
that and make it part of the wisdom of the organization."
So what are the important lessons? Experienced corporate dealmakers
will find many of them familiar. Acquisitions, IBM knows, are often the
fastest but rarely the only way of adding capabilities its customers
need. "We build more than we buy," notes Mills, whose tool kit also
includes licensing and partnering. Cultural fit - especially with
regard to customer relationships - matters a lot. A cool-headed
negotiator from the corporate development team is the antidote to "deal
heat," a manager's vulnerability to overpaying in a transaction he's
initiated. Moving a smaller company's products through IBM's global
distribution channels pays off handsomely - a fact that looms
especially large given IBM's strict attention to each acquisition's
return on investment. And above all: Choose and position acquisitions
knowing that they must function as parts of a technological and
commercial whole. "What we learned was, to really get the value out of
an acquisition, you had to integrate it," Mills says.
But if the wisdom is easy to summarize, it hasn't always
been simple to apply. This is, after all, IBM - a company with five
major operating units, $89.1 billion in revenue, 320,000 employees in
170 countries and a declared strategy of leading the information
technology industry into an era of "on-demand" service, where companies
tap processing power as and when they need it and automate their
business processes quickly and dynamically. That strategy, announced by
Palmisano in 2002, builds on IBM's historic, life-saving pivot toward
software and services, led by his predecessor, Lou Gerstner.
IBM's dramatic turnaround and subsequent drive to truly lead its
industry again have naturally required big changes throughout the
company. The services group, now IBM's largest unit, with $42.6 billion
in revenue, has seen its share of the action - including the purchase
of PricewaterhouseCoopers LLP's consulting arm for $3.5 billion in
2002. But nowhere have the developments been more apparent, or more
important, than in software. The shift from proprietary to open
systems, from inventing and directing everything in-house to looking
outside for partners and ideas, from letting proud business units call
most of their own shots to striking a better balance between central
control and business unit autonomy - all these have played out in the
software group. The buildup of IBM's acquisitions expertise must be
understood in this context.
Tellingly, one of the first major events in the life of the software
group was an acquisition, launched in 1995 shortly after Gerstner
created the group from a sprawling, IBM-centric collection of software
assets. Yet if the purchase of Lotus Development Corp. in a $3.2
billion hostile deal in 1995 signaled that "things had changed at IBM"
(as Gerstner later wrote), the caution with which the prize was treated
afterward showed what a long-term project the change would be. Like
Tivoli, purchased for $743 million in 1996, Lotus was run as an
independent subsidiary - making its own decisions on matters such as
product release cycles and which countries it would do business in -
until 1999. The reason was that IBM had to establish its credibility as
a neutral purveyor of software. "The view of IBM then," says Jeanette
Horan, who came to work for Lotus in 1998 and is currently head of
IBM's Silicon Valley labs and a vice president in the data management
division, "was that it invested in software only to sell more
hardware."
| A big earner, too |
| Software
produced 16% of IBM's $89.1 billion in 2003 revenues, but its pre-tax
income of $3.8 billion was more than a third of total company income. |
|
Division |
% of total revenues |
Revenues ($bill.) |
| Global services |
47.8% |
$42.6 |
| Software |
16.0 |
14.3 |
| Systems group |
15.7 |
14.0 |
| Personal systems group |
12.8 |
11.4 |
| Technology group |
3.3 |
2.9 |
| Global financing |
3.1 |
2.8 |
| Enterprise investments |
1.2 |
1.1 |
| Total |
100.0 |
$89.1 |
|
|
Today the perception is far different, as IBM has
successfully positioned itself at the center of an IT ecosystem where
customers can keep their options open. Consistent with its historic
strength in big data centers, IBM's main job is the "middleware" - the
all-important infrastructure software that sits between the operating
system level and the application level and provides big companies with
capabilities they need for a wide variety of tasks. Transaction and
data management, security and collaboration are among the middleware
functions that IBM products deliver, and as a convert to open systems,
IBM designs those products to run on any operating system.
The strategy contrasts sharply with that of chief rival Microsoft
Corp., which wants customers to rely mainly on its own products; or of,
say, Oracle Corp., which sells middleware but also applications. IBM
exited the applications business in 1999 and now collaborates with SAP
AG, Siebel Systems Inc. and 100 or so other application vendors that
design their products to run on IBM's middleware platforms. (It's also
a major reseller of Microsoft products. The IT world is a complicated
place.)
Offering a seamless array of infrastructure products isn't simple,
though, especially if the divisions providing them are hefty,
semiautonomous companies in their own right. Thus the software group
has had to undergo what Simon Hayward, an analyst with Gartner Group
Inc. in San Jose, Calif., describes as its own three-stage integration.
Stage 1 was operational: aligning customer service, finance and other
functions. Stage 2 was technical harmonization; since taking over in
2000, Steve Mills has pushed the divisions to "componentize" - that is,
settle on common building blocks for their products. Stage 3? "It's a
marketing strategy, to position the different elements of the group
against market targets," Hayward says. Thus Lotus is the human
interface brand, Rational the development tools brand, and so forth.
Even as the internal organization has grown tighter, the pace of
acquisitions has quickened. Many have been small, done to fill in gaps
in a particular division's portfolio. Others, such as Rational, have
been larger. But to varying degrees, all the deals have entailed the
coordination of two kinds of teams - one handling strategy, the other
business and corporate development - operating in sync at the software
brand level, the software group level and the corporate level.
"IBM is matrix upon matrix," says Horan, who ran the 30-person
strategy team at the software group level until the end of last year.
"It's the only way it can work." As strategy chief she reported to
Mills but also worked closely with senior vice president Bruce Harreld,
corporate head of strategy. Her group-level counterpart in business
development, John Newman, likewise reports up to Mills (through group
CFO George Harrington) but works closely with corporate development
chief Johnson.
"People at the corporate level try to make sure things are fitting
in with the overall strategy of the company," says Horan, who is 48 and
has a degree in mathematics from the University of London and an M.B.A.
from Boston University. "And they have the deep expertise in how to
structure a deal. Folks at the software group level are much more in
tune with the software group strategy. They know what's important to
the group and would be more able to assess things like cultural fit.
And then at the brand level, they're the ones who can assess the
particular technology fit."
The brand level is also a good place to stand to see how all this
complex machinery actually works. Consider, for example, the
experiences of Austin, Texas-based Tivoli, which posted revenue of more
than $1 billion last year and has a 15-member business development team
working alongside a five-person strategy team (with the latter two
numbers indicating a level of resources some Fortune 500 companies
would envy).
Running the Tivoli business development team is Jack
Desjardins, 45, who joined IBM fresh out of business school and rose
through the ranks in a variety of financial jobs. In an industry
characterized by tremendous interaction among all the participants, his
team's job is to interact with the other players in a variety of modes
- from ongoing conversations to partnerships to licensing agreements to
acquisitions. "I put in place, from a Tivoli standpoint, any
relationship that we would have with another software or hardware
company," Desjardins says.
Acquisitions aren't the biggest part of his job by any means. But
they are a high-profile part, and the bigger they are, the higher the
profile. Tivoli did three in the past two years - Access360, Think
Dynamics and TrelliSoft Inc., all private companies. The process starts
with the local team deciding an acquisition is the best way to meet a
market need they've identified - with or without any particular target
in mind. Then, with Tivoli chief Robert LeBlanc naturally taking the
lead, the initiative takes shape and wins approvals, first at the
software group level and then at the corporate level. "One of the ways
to think about it is that IBM corporate is our investment banker,"
Desjardins says. "We're trying to attract capital from the corporate
team."
The corporate team, for its part, is trying to help Tivoli use that
capital wisely. So while the corporate team typically handles the
face-to-face negotiations with a seller, it's Tivoli that prepares the
business case that really determines what an acceptable price would be.
"We have a five-year commitment on a business case we make to IBM,"
Desjardins says. "And that's tracked with a fair amount of rigor, in
quarterly meetings with the software group and corporate."
The entire process, software chief Mills notes, is a fluid one,
meant to combine necessary controls with equally necessary flexibility.
The deal committee's final stamp is an important part of the process,
but the committee looks at far more ideas than the company acts on.
Some targets pitch themselves but are found wanting; other targets are
approached but found unwilling. Pre-reviews can save valuable time in a
fast-changing business. "The idea is to move with reasonable speed,"
Mills says.
Another way of fostering collaboration and flexibility is through
the familiar mechanism of moving people from job to job. Mills often
pulls domain experts into a business development role. Meanwhile, the
young Tivoli staffer who did much of the strategic analysis
underpinning the Access360 acquisition now works in corporate
development at IBM's Armonk, N.Y., headquarters.
Of course, it isn't just junior strategists who will attest that
what IBM really stands for is "I've Been Moved." There's also Solazzo,
whose assignment to the Rational integration says something about
corporate flexibility but much more about IBM's commitment to careful
and thorough integration of what it buys. At 48, Solazzo is now vice
president, software group-Americas, and also walking proof that
successfully managing an integration project is good for your career at
IBM.
With more than 3,000 employees and a $2.1 billion price tag,
Rational was a big deal by IBM's standards. Solazzo's nine-month stint
as its integration manager spotlights much of what IBM wants out of its
acquisitions - and also much of what it has learned about doing them.
Solazzo started out by assembling a 15-member team, all of them
veteran IBM executives with expertise in key functional areas - human
resources, IT, finance and so forth. They worked with counterparts at
Rational on a methodical changeover of these functions, with daily,
weekly and monthly milestones.
Transferring a payroll system is the easy part, though. A far more
profound issue was transferring the people, who are, of course, the
most important asset in any software industry acquisition. The software
group has 38,000 employees today, including a sales force of more than
13,000 and 20,000-plus developers. A significant number arrived via
acquisitions; the $1 billion Informix deal, for example, added 2,500
employees in 2001. The path with Rational was smoothed by the
friendliness of the acquisition. ("I've known Mike Devlin for years,"
Mills notes.) Still, Solazzo had to work on the financial
considerations, including stock options, that would keep key people on
board.
But it takes more than money to achieve the 90%-plus retention rate
IBM reports in its software acquisitions. With Rational, as in previous
deals, IBM minimized the negative effects of its size by assigning each
new employee a "buddy" whose role was simply to explain basics, such as
how to file an expense report. And it made the most of inducements,
especially career opportunities, that only IBM can offer. Grady Booch,
one of the founding fathers of object-oriented programming, is now an
IBM Fellow - one of the company's overall technical leaders, a few of
whom are Nobel laureates - while continuing in his role as Rational's
chief technology officer.
Where Booch went, other Rational people would surely follow. Solazzo
describes the scene at a meeting of the Rational salespeople, convened
shortly before they were migrated over to the IBM sales system: "We put
Grady up on a stage, just sitting on a barstool with a microphone," he
says. "And he just talked for 45 minutes, and the subject of his talk
was 'Why I want to stay and work at IBM.' "
Given its soaring ambitions, IBM is sure to need those salespeople
in the years to come - along with a lot of other talented folks, some
of whom it has yet to meet. The technical challenges posed by the
on-demand strategy are large, and the competition from Microsoft,
Hewlett-Packard Co. and others is tough. "I don't expect to send my
developers home during my career," Mills says. "We're not looking to
take a hiatus on anything we do. We're still looking to add partners
and relationships. And acquisitions are still on the menu." In 2002
Palmisano said IBM would spend $10 billion for acquisitions, research
and marketing in support of on-demand. It's a huge bet - but the skill
the company has built up in making acquisitions improves the odds
considerably. - Kenneth Klee
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