IBM: The Impact Of The Varicent Acquisition

| About: International Business (IBM)
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Last week, IBM Corp. (IBM) announced the acquisition of Varicent Software, a leading provider of analytics software for compensation and sales performance management. The deal is expected to close in the second quarter of 2012. Varicent is a fast growing company, providing incentive compensation and sales performance management.

IBM: History of acquisitions

IBM has a history of combining R&D and acquisitions in creating the world's deepest portfolio of analytics solutions, business and industry expertise. The growth rate in business analytics is in the double digits. Data collection, processing, and interpretation systems used in decision making is growing as enterprises seek to improve processes.

Varicent Analysis

Varicent is fast growing firm, as revenue increased 40 percent y/y. Bookings grew 93 percent in the fourth quarter compared to the year ago quarter and 73 percent in 2011. Varicent develops software and although it is a private firm and the financials aren't disclosed, it is likely to be a high margin business. Varicent has more than 180 customers using its software, including Starwood Hotels, Hertz, Office Depot and Farmers.

IBM Analysis

Although the terms of the deal have not yet been disclosed and it is difficult to conduct any analysis on the price IBM paid for Varicent, IBM is probably acquiring a high margin, high growth business; a theme that fits with its current strategic positioning framework of transforming to a high margin enterprise. In addition, Business Analytics sales grew in the mid-teens last year percentage-wise, and IBM should be able to continue the pace of growth in sales of Business Analytics software medium term.

IBM will be able to offer its existing clients sales and incentive performance management, while leveraging its relationship with Varicent to offer its existing clients IBM's enterprise solutions.

The acquisition should be a boost to top-line and bottom-line growth for IBM both short term, and medium to long term. Notwithstanding, the relative size of Varicent and IBM will limit the impact of value creation in the short term. There are questions surrounding the ability of IBM to continue its pace of high quality acquisitions and as a consequence growth by acquisition strategy.

Outcome of the acquisition for enterprise customers

The impact on finance, insurance, technology, retail and medical device companies is increased sales and compensation management - improved operating margins over the medium to long term. In addition, firms should be able to cut IT payroll costs, since processes, once labor intensive, will be automated.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.