IBM Is Cloudgazing With Its Latest $4.6 Billion Software Company Acquisition
Key takeaways
- IBM
IBM
- CEO Arvand Krishna has made 30 acquisitions since his tenure began in 2020
- IBM stock was up 1.48% at the announcement, but shares are still down over 7% in 2023
IBM has formally announced it’s buying software company Apptio for $4.6 billion, marking the computing giant’s seventh purchase this year alone and another big step into delivering improved AI and consulting services to its enterprise client base.
The acquisition news was a rare glimmer of hope for IBM’s share price, given the stock has had a gloomy 2023 so far. Given the share price doldrums, investors will be wondering if the company’s aggressive expansion strategy is enough to shake IBM’s malaise. Here’s the latest.
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What is IBM’s latest acquisition?
IBM has continued its red-hot acquisition streak with a $4.6 billion purchase of cloud software company Apptio. The deal is expected to close in the second half of the year, with IBM paying private equity firm Vista Equity Partners, who bought Apptio for $1.9 billion in 2019, in cash.
Apptio is a software-as-a-service business that helps enterprises manage everything to do with their IT – think budgets, optimizing stacks and forecasting. It has over 1,500 customers and partnerships with some of the biggest companies in the world, including Amazon’s
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IBM has confirmed Apptio will work alongside IBM’s existing IT automation software services to help companies manage and optimize their IT infrastructures and that Apptio would boost IBM’s consulting and AI portfolios.
IBM and Apptio already had a history of working together, such as in 2021 when they collaborated to accelerate cloud enterprise transformation for businesses. “Technology is changing business at a rate and pace we’ve never seen before. To capitalize on these changes, it is essential to optimize investments which drive better business value, and Apptio does just that,” IBM CEO Arvand Krishna said in a statement.
IBM CEO is on a tear
There’s no denying IBM has undergone a massive expansion phase for the last three years. The Apptio acquisition is the seventh purchase that IBM CEO Arvind Krishna has made this year, and arguably, IBM is single-handedly propping up the otherwise glacial M&A market in 2023.
Its other acquisitions from this year include Uptake Technologies in March, Ahana Cloud in April and Polar Security in May. Overall, 30 acquisitions have been completed since he took the top job in 2020 – we’d call that a corporate shopping spree.
There’s a clear focus in the strategy: cloud computing. The company’s biggest-ever acquisition so far was its $34 billion buy of software provider Red Hat
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The company is also focused on running leanly, making 3,600 job cuts earlier this year when other tech companies made mass layoffs. Krishna also spoke out earlier this year about how he expects artificial intelligence to replace 7,800 jobs and that hiring for non-customer-facing roles, such as HR, was pausing for the foreseeable future. “I could easily see 30 per cent of that getting replaced by AI and automation over a five-year period,” he said about the company’s future workforce structure.
Wall Street’s reaction
IBM shares closed 1.48% higher on Monday to hit $131.34, breaking a five-day losing streak for the stock. The Apptio acquisition is considered to be a good move for IBM. Vista said Apptio had doubled its revenue, tripled its customer base and quadrupled its EBITDA margins in the four years it’s owned the company.
One analyst puts Apptio’s revenue for the year ahead between $500 million and $800 million, which could contribute one point towards IBM’s yearly revenue growth. But IBM’s stock has flagged this year, falling 7.21% since the start of 2023 and way off from its $202 peak for the stock a decade ago.
IBM’s position in the AI race
On the face of it, it’s a head-scratcher that IBM stock is trailing this year when companies like Nvidia are absolutely flying. Everyone knows IBM is one of those famous early AI adopters – its supercomputer, Deep Blue, stunned the world when it defeated the world chess champion in 1997. Then came IBM’s Watson supercomputer, which perhaps some saw as a failure when Watson Health was sold off.
But IBM recently launched Watson X, a three-pronged AI platform that develops data sets, is a data store and creates guardrails for AI applications. It’s somewhat similar to Nvidia’s AI offering, except Nvidia stock has skyrocketed nearly 184% this year thanks to a string of AI-related announcements.
IBM isn’t short of announcements, either: it recently expanded its Adobe
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Perhaps investors and analysts are concerned about revenue: in the latest earnings report IBM reported $14.25 billion for the quarter compared to analyst expectations of $14.35 billion, against a backdrop of ten years of declining revenue. Or perhaps in a lightning-fast race, IBM is simply considered the old guard – which is exactly what Krishna is fighting back against.
The bottom line
Despite the groundwork it’s already put in, IBM faces an uphill battle in convincing Wall Street it can become a market leader in AI. But the Apptio acquisition news is certainly good for the stock price and hints that IBM’s fortunes may turn around sooner rather than later. The proof will be in improved revenue returns for the company and ensuring its buying spree has paid off.
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