Big Blue Adds to Its Software Empire

Since 2004, IBM (NYSE: IBM  ) has pumped out roughly $15 billion per year in cash flow from operations. That's certainly a nice thing, as the company continues to buy back shares as well as buying up companies. In fact, the latest deal came yesterday, when IBM agreed to shell out $5 billion for software powerhouse Cognos (Nasdaq: COGN  ) .

Cognos has been the target of buyout rumors for a couple of years. A key reason is that the company builds applications for business intelligence (BI), which is hot in the tech world. BI helps companies analyze corporate data to help spot problems and monitor strategies.

Interestingly enough, Cognos' two main rivals have already agreed to sell out -- making the competitive environment much more challenging. Last month, SAP agreed to buy Business Objects (Nasdaq: BOBJ  ) for $6.8 billion. Then, in April, Oracle (Nasdaq: ORCL  ) acquired Hyperion for $3.3 billion.

The valuation of the Cognos deal is reasonable, coming in at a little more than five times revenue. This compares to the Hyperion deal at four times revenue and the Business Objects acquisition at 4.9 times revenue.

Cognos has more than 23,000 customers and revenue of about $900 million over the past 12 months. In the third quarter, the company posted a 10% increase in revenue as the flagship product line, Cognos 8, continues to gain traction.

IBM also sees Cognos as a platform for cross-selling its other products, in areas like consumer packaged goods, pharma, and education. Another boost should come from IBM's global consulting division. True, megadeals can get complicated, and they can be time-consuming. But IBM has been an active player in the software space. Also keep in mind that the company has cultivated a strong relationship with Cognos over the past 15 years.

All in all, Cognos is a good pick for IBM. It will be a key part of the company's move to shift more revenue to software, which should help boost margins and cash flows. However, in the short run, IBM may see some slowing because of the problems with the economy and the disarray in the financial services sector. So while IBM is preparing for the long haul, the near future could be rocky.

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