IBM, Sterling Deal Would Benefit Both Companies

Includes: IBM, T
by: Trefis

IBM (NYSE:IBM) has signed a definitive agreement with AT&T (NYSE:T) to buy its Sterling Commerce division for $1.4 billion. For Sterling Commerce, this means moving into the hands of a company that can foster its future growth as well help it compete better in its vertical.

For IBM, acquiring Sterling is a worthwhile addition to its middleware software division, which constitutes around 46% of the $177 Trefis price estimate for IBM’s stock. The company plans to integrate Sterling’s platform into its popular Websphere group.

Below we discuss in detail how this deal can turn out to be profitable for both IBM as well as Sterling Commerce.

IBM’s Software Offering To Businesses Broadens With Sterling’s Addition

IBM is a leading business critical software vendor known for its popular Websphere and Information Management software. The acquisition of Sterling Commerce aligns with IBM’s long-term goal of increasing its business-relevant software offerings and thereby maintaining its profitability.

Sterling Commerce’s platforms will expand IBM’s ability to help its business clients create more intelligent and dynamic business networks by simplifying and automating the way they connect and communicate with customers, partners and suppliers, both on-premise and cloud computing delivery models.

As IBM plans to integrate Sterling Commerce’s platform with its Websphere group, we have updated our model for IBM’s stock accordingly. This has resulted in an increase in Trefis price estimate for IBM’s stock from $175 to $177.

We do not expect much increment to our earlier projections for IBM’s software license revenues for 2010 as the deal is expected to close in the second half of 2010. We have however increased our 2011 revenue forecast from our previous estimate of $6.5 billion to $6.8 billion. Apart from this, additional revenue will be generated through maintenance and service contracts from these license sales.

IBM’s Network Will Boost Sterling Commerce Sales

Sterling Commerce, which has a client base of 18,000 companies spread across financial services, retail, healthcare, manufacturing and communications sectors, is the No. 2 player in its business after GXS Inc. IBM’s global reach and broad base of business clients will provide Sterling Commerce an opportunity to grow its customer base and thereby compete better in its vertical.

Disclosure: No positions