IBM Tools Up Another Deal

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Since 1928, IBM (NYSE: IBM) has had a presence in Sweden. As of last week, the relationship got stronger when the company made a $745 million offer for Sweden-based Telelogic. Like its recent purchase of Watchfire, IBM's potential acquisition of Telelogic should be a nice fit and a growth driver.

Telelogic builds software that helps with the design and delivery of embedded software. The technology is at the core of such things as consumer electronics devices, medical systems, and airplanes. Some of the marquee customers include DaimlerChrysler (NYSE: DCX), GE (NYSE: GE), and ABB Ltd.

IBM will fold Telelogic into its tools division, Rational. While both companies have been rivals, they have also realized the importance of developing standards and have cooperated over the years.

For fiscal year 2006, Telelogic's revenues have increased 18% to $217 million and profits were $22.8 million. The revenue forecast for 2007 is for 7% to 12%. But with the heft of IBM, the growth will likely be higher. Big Blue plans to cross-sell Telelogic's software through its massive Global Services unit. The deal will also bolster IBM's competitive advantage against players like Borland (NYSE: BORL) and Serena.

The valuation for Telelogic is about 3.4 times revenue, and IBM has made a tender offer for the shares. But investors have bid Telelogic's stock price slightly above the offer, meaning they think IBM will likely need to up the bid. However, in light of the advantages of the deal, it should be well worth it.

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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,831 out of 30,414 in CAPS. The Fool has a disclosure policy.