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Executive Editor

IBM shells out $2.1 billion for Rational Software

Dec 09, 20024 mins
Enterprise ApplicationsIBMMergers and Acquisitions

With its $2.1 billion acquisition of toolmaker Rational Software, IBM says it hopes to become its customers’ single source for building, deploying and managing business applications.

With its $2.1 billion acquisition of toolmaker Rational Software, IBM says it hopes to become its customers’ single source for building, deploying and managing business applications.

Traditionally the domain of programmers, application development today is of more strategic importance to companies as they look to evolve their application infrastructures to accommodate new technologies such as Web services, experts say.

The desire for applications that can be extended outside a corporate network and integrated with business partners’ systems is placing greater scrutiny on application design, modeling and testing phases.

Customers are looking for a completely integrated infrastructure environment, says Steve Mills, senior vice president and group executive of IBM Software Group, in a conference call last week announcing the Rational purchase, which is expected to close in the first quarter of 2003. “We see this acquisition as allowing us to focus on the kind of end-to-end application development and process integration capabilities that we hear customers telling us they want.”

Rational makes tools for developing business applications and methodologies for managing software development projects. Its tools support development on multiple platforms including Java 2 Platform Enterprise Edition (J2EE), Microsoft’s .Net and Linux.

The deal announced late last week calls for IBM to pay $2.1 billion in cash for Rational. The buy – IBM’s largest software purchase since the $3.5 billion Lotus deal in 1995 – will significantly raise IBM’s profile in the application development market.

In buying Rational, IBM gains the market leader in software configuration management tools, says Dick Heiman, research director at IDC. Rational also is among the leaders in the application testing and modeling markets, he says.

IBM has been a Rational customer since 1985, and the two companies formed a strategic alliance in 1999. Rational also has cultivated partnerships with many other vendors including Microsoft, Oracle and BEA Systems.

IBM says it is committed to preserving Rational’s standards-based, cross-platform tools strategy and maintaining Rational’s partnerships. However, Dennis Gaughan, research director at AMR Research, questions whether IBM can keep its promise.

Location: Cupertino, Calif.
Founded: 1981
Employees: 3,500
Primary business: Software development tools
CEO:Michael Devlin
Financials: Posted net loss of $75.9 million on revenue of $689.8 million for fiscal 2002, ended March 31.

“On one hand, IBM talks about tightly integrating [Rational’s tools] into the IBM stack; on the other, it talks about remaining open to support a heterogeneous world,” Gaughan writes in his analysis of the deal. “Success is rarely achieved on neutral ground, so it stands to reason that IBM will pull Rational more closely to the vest at the expense of the other vendors in the market.”

Gaughan says whether IBM keeps Rational’s partnerships intact will be especially relevant to Microsoft, which had a very close relationship with Rational. He suggests the deal could be the first salvo between IBM and Microsoft in their battle for the upper hand in Web services opportunities.

Ruslan Zenin, senior system architect at UBS Bank in Ontario, says the deal is good news for IBM customers and will make IBM’s WebSphere Studio Application Developer (WSAD) suite more competitive with development products from companies such as Borland – which recently acquired TogetherSoft, a maker of application design and modeling tools that competes with Rational.

“I can see the tendency on the market to deliver development tools all-in-one style,” Zenin says. “The whole development process could be done with IBM products starting from [Rational] Design tools to J2EE development tools [WSAD].”

Using one source for more application development resources will reduce the vendor evaluation work UBS Bank has to handle, Zenin says.