All Big Blue wanted for Xmas was a little network monitoring software. This morning IBM announced plans to acquire Micromuse for $865 million in cash [$10 per share] pending the requisite shareholder approvals. Micromuse will be rolled into the Tivoli Software group, which is [along with Microsoft, CA, HP, BMC and, to a lesser extent Mercury Interactive] a major force in the systems management software arena.
According to the Wall Street Journal [sub required], Lloyd Carney [CEO of MUSE] described his company as being in "no man's land" -- large enough to bring sophisticated products to market but too small to compete with giants like Tivoli and grow into new areas. Kudos to Lloyd for the honest response.
While $865 million isn't a lot of money for IBM [they had over $8 billion in cash equivalents at the end of September], there's no question that IBM made an aggressive move to bring Micromuse into the fold...
- 39% premium over yesterday's close; one of the higher premiums to close we've seen paid for a software company this calendar year
- 23% higher than Micromuse's 52-week high of $8.13
- 5.4x TTM revenues
- 11x TTM maintenance revenues
There is no question IBM paid a hefty price [relative to other recent software M&A] for Micromuse, particularly when one considers that Micromuse had been struggling to grow organically for some time [note: license revenues increased increased 34.8% last quarter, signaling to some a much sought after rebound in the company's growth prospects].
Why Micromuse and why now?
For a long time, network management was disintermediated from systems level management. Different groups within the IT organization were responsible for maintaining network integrity and the large systems management platforms were content to integrate products from niche vendors into their dashboards. But, as the market has matured, we're seeing an ever-increasing blurring of the lines between the software [application layer] and network infrastructure. Bill has an excellent take on how message-aware networking is creating a collision course for software vendors [IBM] and networking vendors [Cisco] at Burnham's Beat.
The proliferation of broadband [and with it VOIP, IPTV, Web-conferencing] along with the ubiquitous nature of IP-based applications has driven the need to offer large enterprise clients a holistic view of all layers of the technology stack.
IBM, despite its mammoth size, had a material hole in its portfolio related to network monitoring. With HP/Openview and CA [via the acquisitions of Concord and Aprisma] already offering network-level monitoring, IBM needed to be able to check off that box on incoming RFPs.
Another important point to remember is that the existing partnership between Micromuse and IBM had been gaining importance over the last calendar year [according to several analysts I've spoken with]. IBM was in position to know whether Micromuse was on the verge of license revenue re-acceleration [and commensurate margin leverage], and recognizes that $10 today could easily have been $15 nine months from now if MUSE executed to plan.
There remain questions I would want answered if I was an IBM shareholder [which I'm not]:
- Micromuse generates more than 60% of revenues from carriers, which is why MUSE partners like Cisco and Alcatel were rumored suitors, what is IBM's plan for that segment of the market?
- How does this acquisition impact the partnerships with Cisco [hint: it's not a positive, see above], EDS and Alcatel...all material revenue generators for MUSE in recent years?
- Were there other active suitors that justified such a marked premium to both MUSE's current stock price and relative to the multiples paid for other software M&A in recent quarters?
- Will IBM maintain the current product roadmap for NetCool and does this acquisition signal Tivoli's willingness to treat network-level management as something more than the bastard stepchild of sys management?
Note: At the time of this writing I and/or funds I maintain discretionary control over maintained a long equity position in CSCO but did not maintain positions [long or short] in BMC, CA, MUSE, ALA, HWP or IBM.
tivoli IBM micromuse M&A software woodrow netcool network Cisco investing tech
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