The past 30 days have been quite remarkable, even for a company the size of IBM (NYSE: IBM). Big Blue has announced that it's buying four major companies for a total value of $3.6 billion. This is definitely the result of intensive planning through which management is signaling a major strategic shift. By focusing much more on software, it's trying to establish a growth path for the long term.
In yesterday's deal, IBM shelled out $1.3 billion for Internet Security Systems (Nasdaq: ISSX). The company's philosophy is that security cannot be handled with technology alone. Instead, it's also critical to have a top-notch team of security experts. "ISS brings strong security services management expertise, as well as a strong and complementary product line," Nick Selby told me in an interview. Selby is an enterprise security analyst at the research firm The 451 Group.
Moreover, security is still a growth market since it's a "must have" for corporate America. Witness AOL's release of search query results on the Internet. It was a serious breach of privacy and a huge embarrassment, resulting in the resignation of the chief technology officer.
So, it would not be a surprise to see more security deals from IBM, as well as a host of other players including Hewlett-Packard (NYSE: HPQ) and Microsoft (Nasdaq: MSFT). As an example, EMC (NYSE: EMC) recently purchased the security provider RSA.
Does this mean you should heighten your interest in publicly traded security companies like Check Point Software (Nasdaq: CHKP) and McAfee (NYSE: MFE)? Not necessarily. Often the better technology is found in private companies. Some examples include ArcSight, SenSage, and Network Intelligence.
However, security is only one piece of IBM's strategy. With its recent acquisitions, it looks like it's building a one-stop set of offerings. For example, there's the $1.6 billion purchase of FileNet, which helps companies manage unstructured content like emails and spreadsheets. There's also the $740 million purchase of MRO, which helps track corporate assets. And there are rumors that IBM wants to buy a business-intelligence vendor like Cognos (Nasdaq: COGN) and perhaps even a customer relationship management (CRM) company like Salesforce.com (NYSE: CRM).
The good news is that, for the most part, these mid-tier software companies are relatively inexpensive because of their reliable customer bases and strong cash flows. What's more, these customers are good candidates for IBM's massive services business.
Finally, according to a recent analysis from Fool colleague Brendan Mathews, IBM appears to be selling at a discount to its assets value. Given that software provides the highest margins, the valuation case is even better. If software has helped Hewlett-Packard (NYSE: HPQ) deliver strong quarterly results, why not IBM?
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Fool contributor Tom Taulli does not own shares mentioned in this article.
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