Cognos/IBM: When Do You Sell a Software Company?

Includes: COGN, IBM
by: Tom Taulli

Yet again, there is another mega deal in software:  IBM (NYSE: IBM) agreed to purchase Cognos (Nasdaq: COGN). 

I think it’s a smart deal.  After all, Cognos is still growing and has an extensive product suite in business intelligence, which allows customers to improve the analysis on its data.

But this raises an important issue that many companies face:  when do you sell out?

Keep in mind that Cognos started operations in 1969.  And, no doubt, I’m sure it got its share of buyout offers. But it looks like it made sense for the wait (after all, IBM is shelling out $5 billion on the deal).

I suspect that Cognos held out because it realized it had an opportunity to be a dominant player in a mega market.  As a result, the company focused on building better products and expanding its distribution.  What’s more, there were some savvy acquisitions along the way to bulk up.

But, with its market maturing, Cognos realized that the go-it-alone strategy was getting riskier.  Just this year, Oracle (Nasdaq: ORCL) purchased Hyperion and SAP (NYSE: SAP) agreed to buy Business Objects (Nasdaq: BOBJ).  Suddenly, Cognos had some big-time competitors.

Yet, this is still an unusual case.  For the most part, companies do not have big market opportunities.  Rather, the value is as a niche.  So, selling out sooner often makes a lot more sense — and could ultimately stave off a disaster (that is, when a mega competitor moves into the market).