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International Business Machines Corp.

IBM Acquires Lotus Development Corp. for $3.5 Billion in Cash

Strategic Insights

— 2 min read

IBM's massive acquisition of Lotus Development Corp. for $3.5 billion in cash, the largest in the computer industry to date, promises to bring together two industry leaders in a "win-win" partnership according to IBM CEO Louis Gerstner. The deal, which stunned the computer industry, will see Lotus employees retain their independence, with CEO Jim Manzi staying on as an executive vice president at IBM. However, industry experts remain skeptical about the deal's long-term prospects, citing IBM's poor track record with software acquisitions.

Key Takeaways:

  • IBM's acquisition of Lotus Development Corp. is the largest in the computer industry to date, with a deal value of $3.5 billion in cash, dwarfing Microsoft Corp.'s $2.1 billion offer to buy Intuit Inc. and Computer Associates International Inc.'s $1.78 billion offer to buy Legent Corp.
  • IBM will allow Lotus employees to retain their independence, with CEO Jim Manzi staying on as an executive vice president at IBM, without an employment contract.
  • Industry experts remain skeptical about the deal's long-term prospects, citing IBM's poor track record with software acquisitions, including NextStep, Metaphor, Kaleida, and Taligent.
  • IBM's track record with software acquisitions is "not good," according to Karl Wong, an analyst at the Dataquest market research firm, who also notes that Dataquest is "not big fans of Manzi" but believes that IBM's decision to keep Manzi may signal a change in the company's approach.
  • Lotus plans to go ahead with previously announced plans to reorganize, saving $50 million and laying off some 15 percent of its managers and workers.
  • IBM will use its cash pool of $10 billion to pay for the Lotus acquisition, working through a special subsidiary, White Acquisition Corp, to handle the transaction.
  • The question now is what IBM will do with Lotus, which it is allowing to retain its name and operate as a semi-independent subsidiary.

Statistics:

  • $3.5 billion: The value of IBM's acquisition of Lotus Development Corp.
  • $64: The price per share for the acquisition
  • $80 million: The estimated value of Jim Manzi's shares
  • 1,170,406: The number of shares held by Jim Manzi
  • 50 million: The amount of savings expected through reorganization
  • 15 percent: The percentage of managers and workers expected to be laid off
  • $10 billion: IBM's cash pool used to pay for the Lotus acquisition
  • 8 days: The duration of negotiations between IBM and Lotus before the final agreement

Sources:

  • "Software Industry Report", June 1, pg. 1
  • Dataquest market research firm, analyst Karl Wong

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