IBM to Buy Rational Software for $2.1 Billion

Friday Dec 6th 2002 by Clint Boulton
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UPDATE: Big Blue moves to shore up its hefty on-demand computing backbone by grabbing software infrastructure firm Rational.

IBM Friday moved to pick up its largest software acquisition since it nabbed Lotus in 1995 when it agreed to buy Cupertino, Calif.'s Rational Software for $2.1 billion in cash.

Armonk, N.Y.'s IBM believes Rational, which offers software, practices and services for developing business applications and building software products and systems, will further enable it to build momentum with its on-demand computing strategy because it will now be able to offer a complete software development environment -- including data management, systems management, collaboration, transaction and business process integration middleware.

Rational provides support for enterprise application development on J2EE, .NET, Linux and other platforms to support application deployment on the customers' hardware and software platforms. The firm's tools also are used to build technical software, commercial software products and software for embedded devices and real-time systems, such as pagers, cell phones, medical devices, air traffic control systems and government defense systems.

For its on-demand play, IBM is targeting companies that want to integrate their business processes and software infrastructure across their divisions. The deal is the culmination of a business relationship between the two firms that stretches back 15 years.

"Rational supports what IBM does best, which is provide infrastructure software and software tools to help our customers create a complete software development environment," said Steve Mills, IBM senior vice president and group executive, Software Group. "This deal extends IBM's ability to help customers into the 'on demand' future with tools built on industry standards to develop, integrate and manage their business processes."

IDC estimates the market opportunity for application development software will grow from $9 billion in 2002 to $15 billion in 2006.

Analysts said they were not surprised by the deal and discussed its different aspects with internetnews.com.

Amy Wohl, of consultant firm Wohl Associates, said given the fact that "IBM has been buying up the universe for the last six months, it makes sense that it would move to fill in this gap in their tools portfolio."

One key tool that analysts will focus on for the competitive impact of this deal is XDE Professional v2002, an integrated development environment (IDE) tool for both .NET and J2EE programmers to help developers tie designs to software development tools. Rational began selling this product last February.

One obvious question from industry watchers: now that this tool is under the aegis of IBM, who in this space prefers Java or the .NET language, does this tip the Web services development scale in IBM's favor?

ZapThink Senior Analyst Jason Bloomberg, whose firm analyzes Web services and XML trends, doesn't think so, and he said the deal makes a lot of sense for all parties involved -- IBM, Rational, customers and partners.

"There might be a question about Rational's solid relationship with Microsoft, but IBM and Microsoft have a solid relationship on many levels already, and I don't think there will be a problem having IBM offer the .NET XDE," Bloomberg said.

To that end, Wohl dismissed the notion that IBM and Microsoft will definitely be at loggerheads over the purchase, namely because they enjoy very healthy relationships, particularly in the Web services arena. But Wohl admitted it is difficult to predict.

"IBM recognizes Microsoft as being part of the envrionemnt that they're working in," Wohl said. "The real question is whether or not IBM's competitors, such as Sun, will mind the fact that IBM owns a company they have been partnered with. They might find a reason to find a replacmeent for some or all of their relationships with Rational. It's hard to know how this will work out in advance -- a lot of it has to do do with how the other half of the partnership feels their needs are being met, whether or not they feel neglected."

Bloomberg, who was recently briefed by Rational on its Web services strategy, said one glaring weakness, which will be rectified in this arrangement, is Rational's lack of robust runtime support tools. Not anymore, now that it has paired with IBM.

"ZapThink believes that the division between the design time and runtime worlds will blur in the Service-oriented world, so this hole could have been a big problem for Rational with their pure design time focus," Bloomberg said. "Now that Rational and Tivoli are under the same umbrella, there is the possibility that IBM can fill this hole and give companies like Mercury Interactive and Compuware an even bigger run for their money -- but we'll have to see if they will be able to effectively execute on this combination of capabilities from different software divisions."

IBM plans to merge Rational's business operations and 3,400 employees into the IBM Software Group as a new division and fifth brand, joining WebSphere, Lotus, Tivoli and DB2. When and if the acquisition closes, Rational Software CEO and Co-founder Mike Devlin will become the general manager of the new division and will report to Steve Mills.

IBM and Rational anticipate closing in the first quarter of 2003.

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