NEW Makes $ense: Ilog acquisition adds proven toolset to IBMs ...

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Editor’s note: Allan Krans is an analyst with TechnologyBusiness Research.

HAMPTON, N.H. - IBM (NYSE: IBM ) announced Monday the acquisition of Ilog, an 850 employee serviceoriented architecture (SOA) and business process management (BPM)vendor headquartered in France, for $340 million. In terms of size,the purchase of Ilog falls between the billion dollar purchases oftop tier software vendors such as Cognos, but abovetechnology-focused purchases such as Infodyne, which brought 14employees into IBM.

Ilogreported revenue of $181 million and was slightly unprofitableduring its most recent fiscal year, which ended June 30, 2008. Muchof the financial pressure Ilog experienced is due to a high cost ofservices delivery and high operating expense levels, both of whichwill benefit from being part of the larger and more efficient IBMorganization.

IBM maintains a well-established process set and infrastructure tosupport acquisitions, and from a financial standpoint TBR believesIlog will experience growth through exposure to IBM’s directand indirect sales capabilities, and profitability will likelyimprove as Ilog’s development and management infrastructureis integrated within the larger IBM organization. From a technologystandpoint, the acquisition of Ilog will extend and supportIBM’s SOA and business process management strategy, bring ina proven toolset that is widely accepted in the industry.

Sizable partner and customer list: Ilog brings a well-established partner and customer set to IBM aspart of this acquisition, which will likely be leveraged andextended following the close of the purchase. Ilog maintains morethan 500 OEM partners, including IBM, which embed various Ilogtechnologies into their product offerings, and the company alsomaintains a customer list of more than 3,000. The Ilog technologyis widely used in the supply chain management market, and isembedded in a number of leading solutions in the market, fromvendors such as i2, SAP, Oracle, Microsoft, and EMC.

Strengthening the Ties that Bind: Ilog’s largest partner in its 2007 fiscal year was SAP,which accounted for 3% of total Ilog revenue. SAP and Ilog havebeen partners since 1998, when SAP made a 5% investment in thevendor. TBR believes Ilog tools and software are key components inthe SAP supply chain solution and the acquisition of the providerby IBM strengthens and protects the SAP portfolio. SAP supply chaincustomers should rest easier, knowing that a key part of their SAPsolution will be sustained and developed by IBM. In light of themarket consolidation driven by Oracle and IBM, many end-customersare being forced to consider the potential impact of an acquisitionof a key supplier on their IT operations. Today’sannouncement will result in a continuation of a key strategicrelationship between Ilog and SAP, instead of greater encirclementof SAP applications by an expanding Oracle stack. TBR expectscustomers and partners who have invested in both Ilog and SAPecosystems will benefit from the increased level of investment IBMcan place into the vendor, as well as the expanded development,support and integration into the IBM portfolio.

Mid-sized purchase with scalable assets: Aside from large purchases such as Cognos, the majority of IBMsoftware acquisitions focus on small to medium sized softwarebusinesses that have preexisting relationships with IBM and the IBMplatform. By acquiring companies of this profile, IBM is able toleverage its well-established management and distribution networkto rapidly scale revenue and at the same time optimize operationsand increase profitability of acquired assets.

Familiarity speeds integration: IBM brings a strong familiarity with the Ilog technology andpersonnel, as IBM was both a partner and customer of the Ilogproduct set. Prior to the acquisition, IBM embedded Ilog technologythrough a partnership relationship that has existed for more thanten years. IBM also uses the Ilog technology for its ownoperations, using the technology for its chip manufacturingoperations in Fishkill, NY. One of IBM’s primary rules forintegrating an acquisition is to support existing customers bymeeting product development roadmaps, and pre-existing partnershipscan speed technology and development integration following apurchase.

Closer to applications: While IBM remains out of the broad business applications marketdominated by Oracle and SAP, the company is encroaching on the grayarea between middleware and applications. Prior acquisitions suchas Webify pushed IBM towards a componentized middleware strategy,which provides many of the same services as business applications,without requiring adoption of an entire platform. The acquisitionof Ilog is an extension of this push, particularly with thecompany’s LogicTools Supply Chain Management ApplicationSuite. Although the word “application” is used for thesuite, the LogicTools suite is designed to enhance and complementbroader ERP systems. The application suite is an add-on to existingERP platforms, providing information and management tools that canoptimize inventory and supply chain management.