IBM Plans Software Acquisitions to Boost Revenue By $20 Billion By 2015

Senior Vice President Steve Mills says IBM (NYSE:IBM) is planning more acquisitions in order to fuel growth in its $22.5 billion software business.

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Last week, IBM surpassed Microsoft (NASDAQ:MSFT) to become the world’s second-most valuable technology company, after Apple (NASDAQ:AAPL). The company now plans to spend between $100 million to $300 million on targeted acquisitions in order to boost annual revenue by $20 billion by 2015 as its sets its sights on Apple’s number one spot. CEO Sam Palmisano says the company aims to double or triple the pace of sales growth at the companies it acquires, and will look for deals that will be accretive to earnings within two or three years.

IBM took in $99.9 billion in revenue last year, when its software unit had gross margins of 86.9%. The company has made nearly 50 software acquisitions since 2006, more than half of which have been in business-data analysis, on which IBM has spent $14 billion over the last five years. IBM expects its business-analytics products to yield $16 billion in sales by 2015.

The company is likely to make smaller acquisitions, worth less than $10 billion, according to Joel Achramowicz, an analyst at Blaylock Robert Van LLC, an investment bank in Oakland, California. He added that IBM is “making the right acquisitions at the right time.” However, he dropped coverage of IBM back in April, partly because of their unwillingness to make large acquisitions. “That’s one of the reasons we got kind of bored with the stock,” he said. “There are some big software companies out there, which could augment IBM’s position.” In terms of the existing business, “IBM’s done about everything it can to maximize their operating model,” said Achramowicz.

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IBM’s strategy is to look for deals that can augment products it already owns. When the company bought statistical-analysis software company SPSS Inc. for $1.2 billion in 2009, it was to complement the 2007 acquisition of Cognos Inc., whose software creates executive “dashboards” for quickly perusing business data. The former lends the latter more robust statistics capabilities, while the latter lends the former its ability to visually depict data, which has helped accelerate SPSS’s growth since its purchase, said Mills.

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