UPDATE: IBM to buy Rational Software

IBM Corp. has agreed to acquire Rational Software Corp. for US$2.1 billion, the companies said Friday.

Rational, which is located in Cupertino, Calif., provides software tools and services for developing business applications and other products, such as embedded software for cell phones, medical systems and other devices, the companies said in a joint statement.

The acquisition will allow IBM in Armonk, N.Y., to provide a software development environment for companies that want to integrate their business processes and software infrastructure across their operations, including suppliers and customers, the companies said.

Ninety-eight of the Fortune 100 companies, including IBM, already use Rational’s tools, according to the statement.

IBM already offers close integration with a wide variety of Rational’s software products. The IBM WebSphere tools, built on the company’s Eclipse open-source platform, provide a single portal-like interface that gives software developers access to a wide range of tools from other software vendors, including those made by Rational.

Launched last year, the Eclipse project is managed by a consortium of vendors that includes Borland Software Corp., Fujitsu Software Corp., Red Hat Inc. and Sybase Inc. in addition to Rational.

“This will provide IBM with the end-to-end application development process integration that we hear customers telling us they want,” said Steve Mills, IBM senior vice-president and group executive of the Software Group, during a conference call Friday afternoon.

“There’s a shift in focus among medium- and large-size businesses to integrate horizontally, to create an on demand environment, to focus on process integration not function automation. They need tools that provide design capability, and a platform for integrating team development,” Mills said.

Responding to news of the acquisition, Hewlett Packard Co. (HP) said in a statement that it will continue to have a strong business relationship with Rational, including its joint activities as part of the Eclipse.org industry group. HP said that it would continue to work with IBM/Rational and Microsoft and sees the future of application development in interoperability between the Java (J2EE) and Microsoft .Net platforms.

Industry experts said the acquisition does not come as a surprise.

“I think it’s something we had somewhat expected in that there’s been over the past year a movement to where you can see the providers of integrated development environments (IDEs) expanding their toolkits such that they become integrated lifecycle environments,” said Thomas Murphy, senior program director at the Meta Group Inc.

Whereas IDEs have been focused on providing tools for editing, compiling and debugging code, they increasingly need to support so-called “life-cycle management” functions such as modelling, testing and version control, Murphy said.

The announcement is all part of a transformation of the application development market akin to the changes wrought on the office productivity software market by the release of Microsoft Corp.’s Office suite in the 1990s, Murphy said.

Once the acquisition is completed, IBM plans to sell Rational’s application development software through the Rational sales force, which will incorporate into IBM’s own sales team, the companies said. In addition, IBM intends to integrate Rational’s products more tightly with its own software offerings, they said.

“We don’t anticipate any changes to (Rational’s) product structure and road map,” said Paraic Sweeney, vice-president of marketing of WebSphere Business Integration at IBM, during an interview. “The connections are there today between WebSphere Studio and the Rational product.”

The Rational purchase follows a series of announcements this year in which IBM moved towards consolidating its range of development tools onto a single infrastructure with the Eclipse platform as a foundation, and comes amidst predictions that the market for application development tools will be a bright spot in an otherwise dull technology market, according to industry watchers.

A report released by IDC predicted growth of 11.5 per cent annually through 2006 in the market for application development and deployment.

That market will be driven, among other things, by the emergence of Web services and XML (Extensible Markup Language) enabled tools that make older application development tools obsolete, according to IDC.

“IBM needed to be able to expand their platform. For Rational, all the people who used to be their partners were becoming less so. Microsoft is strengthening its own suite; Borland picked up a number of competitors; Oracle is building all this stuff. For Rational and IBM, both of them were driven this way,” Murphy said.

And, with IBM’s size and cash position and the downturn in the technology markets, Rational was an easy target for acquisition, Murphy said.

Rational will join other software purchases including Tivoli and Lotus as a new brand and new division of IBM’s Software Group.

As with IBM’s other purchases, Rational will retain its brand name. But IBM may look to move some of its other, complementary technologies under the Rational umbrella, according to Mills.

Rational co-founder and CEO Mike Devlin will serve as general manager of the division, reporting to IBM Senior Vice-President and Software Group executive Steve Mills, IBM said.

There are no plans for layoffs of Rational workers and no plans to relocate workers at Rational’s main development centres in Cupertino, Calif., and Lexington, Mass., according to Sweeney.

“Our plan is to invest in this business. Our approach to software business is to get the return by exploiting the broad channel that we have and growing the business,” Sweeney said.

However, employees working in some of the company’s smaller branch offices around the world may be consolidated with other IBM facilities in those areas, according to Sweeney.

IBM and Rational anticipate closing the deal in the first quarter of 2003, they said.