IBM will shell out $2.1 billion in cash in exchange for Rational shares at $10.50, marking a 29% premium over yesterday's close. Shares of Rational, not surprisingly, are up by about 25%. The purchase will be IBM's largest software acquisition since it bought Lotus Notes for $3.5 billion back in 1995.
Rational is no fly-by-night concern. IBM, which has had a lengthy relationship with the company, actually bought a stake in the 21-year-old software maker in the late '80s, which it sold in the early '90s. The companies have tinkered with the idea of an acquisition on and off throughout the years, according to IBM.
Bulking up its software and services department has been, and will continue to be, an important goal for IBM. Currently, software revenues make up about $13 billion of its annual $80 billion in sales. Big Blue isn't moving away from hardware altogether, of course, but it does want to boost its share of the software market.
The acquisition of Rational, with a projected $650 million in 2002 revenues, will certainly help achieve that goal. Software developers use its products to create, customize, and test programs used for internal business processes, as well as for embedded use in devices. There's a $9 billion market for that kind of software, and market researcher International Data Corp. expects it to grow to $15 billion over the next four years.
Rational will join IBM's existing stable of software companies -- including Tivoli, WebSphere, Lotus, and DB2 --as a new division and brand. Mike Devlin, Rational's CEO and co-founder, will remain in charge and report to Big Blue's group executive for software, Steve Mills.
IBM expects the deal to affect earnings in 2003 by "a few pennies per share." The purchase won't have an impact on 2004 earnings at all and should add to the bottom line in 2005.