IBM’s Software Acquisition Strategy in Massachusetts (Plus Tips on Getting Acquired) From VP Mike Loria
If you looked at a map of IBM’s local operations and software acquisitions—17 in Massachusetts since 2003, out of a total of 60 worldwide—you might think the company’s headquarters was in Massachusetts, not New York. Between its recently opened Mass Lab in Littleton and Westford, MA (the firm’s biggest software development lab in North America), its research center in Cambridge, and its innovation center in Waltham, IBM certainly has been on the move in New England. And just last week, the company said it is acquiring Waltham-based OpenPages for an undisclosed sum.
So why is Massachusetts such a big deal for Big Blue? And what is the impact of all these local acquisitions on the firm’s growth and business? To get some answers, I spoke with IBM vice president of business development, Mike Loria, who’s now based in Westford after previously working out of Lexington, MA.
Loria is a former Lotus veteran who joined IBM in 2001. He has been part of the firm’s Rational software division, which sells products to software developers, since 2006. He leads the team’s mergers and acquisition strategy, which in recent years has led to IBM’s purchase of security software companies Watchfire and Ounce Labs in Massachusetts, as well as Sweden-based Telelogic, a large business process software firm.
In recent years, IBM has been held up as a model of how to achieve company growth through acquisitions, how to do the tough work of integrating new companies after mergers, and how to formalize that whole process. Loria is in charge of all that for his division, and he has a unique perspective on Big Blue’s acquisition strategy in his own backyard.
Loria says he puts a “four-legged stool” around why Massachusetts is “such a great place” for IBM acquisitions. One reason is the sheer number and quality of universities that produce smart, young developers. “That’s our natural resource,” he says. Two is the presence of a large and active venture capital community to support startups. Three is the proximity to lots of IBM customers, such as financial services firms. “Companies tend to resemble their customers in the area,” he says. And four is IBM’s existing footprint in the area—and the distinguished history of the state’s tech industry. “It’s a software-friendly environment,” he says.
None of those is particularly surprising. Perhaps the last one is most telling: once a big company makes a number of investments in a given geography, it gets more comfortable there, and its existing resources and connections make it easier to pursue more deals. As for why IBM hasn’t made as many acquisitions in Silicon Valley or the Pacific Northwest, it’s hard to say—but perhaps more companies in the Northeast are focused on the kinds of business customers that IBM has.
In any case, the impact of all these acquisitions on the company’s business has been great. IBM estimates that its mergers since 2003—about 100 worldwide, not just in Massachusetts, and not just software—have led to company growth that will propel its earnings per share to $10 to $11 by year-end 2010. The acquisitions have also added some 44,000 employees to the company’s overall roster. IBM didn’t break out any specific numbers for Massachusetts, though it’s safe to say the firm has invested somewhere in the neighborhood of $10 billion in software company acquisitions in the state since 2003.
Loria singles out Watchfire (2007) and Ounce Labs (2009) as Boston-area acquisitions that helped IBM enter the field of Web application security. Watchfire allowed customers to find vulnerabilities in their applications, while Ounce Labs provided a more technical tool to pinpoint those problems in the source code. Both firms had “triple-digit growth in their businesses” after becoming part of IBM, Loria says.
And Watchfire is a classic example of how IBM operates. Loria’s team saw a trend in the software marketplace—lots of anxiety around security vulnerabilities and hackers finding points of entry through Web applications. “We wanted to enter it quickly,” he says. “Watchfire was a partner of ours. We like to acquire a market leader. Integration was easy.”
That speaks to the key factor in IBM’s acquisition strategy: it tends to acquire existing partners that are already driving business. So, having worked together is more important than cultural fit, strong management team, and other platitudes (which are pretty much givens anyway). “It really is, what is the value proposition for our customers?” Loria says. “It sounds like motherhood and apple pie, but it is about how does IBM better serve customers. If we are starting to jointly win deals…or they’re going in to our big customers, and customers love it, they become prime candidates for an acquisition.”
Many companies pitch him on buying them before they’ve formed any partnership, Loria adds. They don’t understand “what a long haul it is to go from that conversation to ‘We’ll buy you,’” he says.
So, of course, I had to ask which current partnerships in Massachusetts are doing well for IBM, to see if I could predict the next acquisition. Loria declined to comment, naturally, but he talked in general about the things the company is excited about.
“If you take the ‘smarter planet’ story that IBM has, that has opened the aperture of the business significantly,” he says. “It’s one thing if you point [business analytics] engines at financial services. But start pointing it at traffic data, start thinking about redesigning highways, and wind farms to best generate energy. Start rethinking smart levies, water systems, power systems…A lot of interesting companies are out there in smart traffic, water flow. On the Rational [software] side, if you’ve bought a car recently, it’s a mini data center going down the road…That has blown up the size of the market we address tremendously.”
That makes it sound like IBM and Detroit—or at least automotive software startups—might be doing more business in the near future. Closer to home, a quick search for IBM partners in Massachusetts reveals at least 63 tech companies (surely there are many more), including Agility Partners, Aternity, Black Duck Software, Certeon, Data Intensity, Entuity, Permessa, Pirean, Progress Software, Rocket Software, Sophos, TriTek Solutions, and Virtusa.
Would Loria tip his hand about his next deal? “Culturally, we’re very acquisition friendly,” is all he would say.