C. Acquisitions/divestitures
Acquisitions
2008
In 2008, the company completed 15 acquisitions at an aggregate cost of $6,796 million. The Cognos, Inc. and Telelogic AB acquisitions are shown separately given their significant purchase prices.
Cognos, Inc. (Cognos) — On January 31, 2008, the company acquired 100 percent of the outstanding common shares of Cognos for consideration of $5,021 million consisting of $4,998 million of cash and $24 million of equity instruments. Through this acquisition, IBM and Cognos will become a leading provider of technology and services for business intelligence and performance management, delivering the industry’s most complete, open standards-based platform with the broadest range of expertise to help companies expand the value of their information, optimize their business processes and maximize performance across their enterprises. The company acquired Cognos to accelerate its Information on Demand strategy, a cross-company initiative that combines the company’s strength in information integration, content and data management and business consulting services to unlock the business value of information. Cognos was integrated into the Software segment upon acquisition, and goodwill, as reflected in the table below, has been entirely assigned to the Software segment. It is expected that 20-30 percent of the goodwill will be deductible for tax purposes. The overall weighted-average useful life of the intangible assets acquired, excluding goodwill, is 6.5 years.
Telelogic, AB (Telelogic) — On April 3, 2008, IBM acquired 100 percent of the outstanding common shares of Telelogic for cash consideration of $885 million. Telelogic is a leading global provider of solutions that enable organizations to align the development of products, complex systems and software with business objectives and customer needs. This results in improved quality and predictability, while reducing time-to-market and overall costs. Clients will benefit from the combined technologies and services of both companies, providing them a wider range of software and system development capabilities used to build complex systems. Telelogic was integrated into the Software segment upon acquisition, and goodwill, as reflected in the table below has been entirely assigned to the Software segment. Substantially all of the goodwill is not deductible for tax purposes. The overall weighted-average useful life of the intangible assets acquired, excluding goodwill, is 7.0 years.
Other Acquisitions — The company acquired 13 additional companies at an aggregate cost of $889 million that are presented in the table below as “Other Acquisitions.”
The Software segment completed eight other acquisitions, seven of which were privately held companies: in the first quarter; AptSoft Corporation, Solid Information Technology, Net Integration Technologies Inc., and Encentuate, Inc; in the second quarter; Infodyne, Beijing Super Info and FilesX. In the fourth quarter, ILOG S.A. (ILOG), a publicly held company, was acquired for $295 million. ILOG adds significant capability across the company’s entire software platform and bolsters its existing rules management offerings.
Global Technology Services (GTS) completed one acquisition in the first quarter: Arsenal Digital Solutions, a privately held company. Arsenal provides global clients with security rich information protection services designed to handle increasing data retention requirements.
Global Business Services (GBS) completed one acquisition in the first quarter: u9consult, a privately held company. u9consult complements the company’s existing capabilities in value chain consulting.
Systems and Technology completed three acquisitions: in the second quarter; Diligent Technologies Corporation and Platform Solutions, Inc (PSI), both privately held companies. Diligent will be an important component of IBM’s New Enterprise Data Center model, which helps clients improve IT efficiency and facilitates the rapid deployment of new IT services for future business growth. PSI’s technologies and skills, along with its intellectual capital, will be integrated into the company’s mainframe product engineering cycles and future product plans. In the second quarter, $24 million of the purchase price of PSI was attributed to the settlement of a preexisting lawsuit between IBM and PSI and recorded in SG&A expense. See note O, “Contingencies and Commitments,” for additional information regarding this litigation. Also, the company recorded a $24 million in-process research and development (IPR&D) charge related to this acquisition in the second quarter. The acquisition of Transitive Corporation (Transitive) was completed in the fourth quarter. Transitive’s cross-platform technology will allow clients to consolidate their Linux-based applications onto the IBM systems that make the most sense for their business needs.
Purchase price consideration for the “Other Acquisitions” was paid all in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.
2008 Acquisitions
| ($ in millions) | ||||
| Amortization Life (in Years) | Cognos* | Telelogic* | Other Acquisitions | |
|---|---|---|---|---|
|
* Purchase price allocation at December 31, 2008 reflects immaterial adjustments from the September 30, 2008 balances. N/A — Not applicable |
||||
| Current assets | $504 | $242 | $185 | |
| Fixed assets/noncurrent | 126 | 7 | 75 | |
| Intangible assets: | ||||
| Goodwill | N/A | 4,207 | 690 | 676 |
| Completed technology | 3 to 7 | 534 | 108 | 94 |
| Client relationships | 3 to 7 | 512 | 127 | 39 |
| In-process R&D | N/A | — | — | 24 |
| Other | 3 to 7 | 78 | 15 | 19 |
| Total assets acquired | 5,960 | 1,189 | 1,112 | |
| Current liabilities | (798) | (141) | (233) | |
| Noncurrent liabilities | (141) | (163) | (14) | |
| Total liabilities assumed | (939) | (304) | (247) | |
| Settlement of preexisting litigation | — | — | 24 | |
| Total purchase price | $5,021 | $885 | $889 | |
The table above reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2008.
The acquisitions were accounted for as purchase transactions, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. For the “Other Acquisitions,” the overall weighted-average life of the identified amortizable intangible assets acquired is 4.3 years. With the exception of goodwill, these identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $676 million has been assigned to the Software ($328 million), Global Technology Services ($68 million) and Systems and Technology ($280 million) segments. Substantially, all of the goodwill related to “Other Acquisitions” is not deductible for tax purposes.
See note A, “Significant Accounting Policies,” for further description of the company’s accounting policies related to business combinations and intangible assets, including goodwill.
2007
In 2007, the company completed 12 acquisitions at an aggregate cost of $1,144 million.
The Software segment completed six acquisitions: in the first quarter, Consul Risk Management International BV and Vallent Corporation, both privately held companies. Four acquisitions were completed in the third quarter: Watchfire Corporation, WebDialogs Inc. and Princeton Softech Inc., all privately held companies, and DataMirror Corporation, a publicly held company. Each acquisition further complemented and enhanced the software product portfolio.
Global Technology Services completed four acquisitions: in the first quarter, Softek Storage Solutions Corporation (Softek) and DM Information Systems, Ltd. (DMIS), both privately held companies. Two acquisitions were completed in the fourth quarter: Novus Consulting Group, Inc. and Serbian Business Systems, both privately held companies. Softek augments the company’s unified data mobility offerings and worldwide delivery expertise for managing data in storage array, host and virtualized IT environments. DMIS will enhance and complement the Technology Service offerings. Novus CG, a storage solution company, will provide improved access to business information, enable stronger regulatory and corporate compliance and improve overall information technology performance. Serbian Business Systems establishes the company’s maintenance and technical support services business in Serbia.
Global Business Services completed one acquisition in the fourth quarter: IT Gruppen AS, which will add to the company’s presence in the retail and media sectors.
Systems and Technology completed one acquisition in the fourth quarter: XIV, Ltd., a privately held company focused on storage systems technology.
Purchase price consideration was paid in cash. These acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.
The table below reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of December 31, 2007.
The acquisitions were accounted for as purchase transactions, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled workforce, neither of which qualify as an amortizable intangible asset. Substantially all of the goodwill is not deductible for tax purposes. The overall weighted-average life of the identified amortizable intangible assets acquired is 5.4 years. With the exception of goodwill, these identified intangible assets will be amortized over their useful lives. Goodwill of $999 million was assigned to the Software ($639 million), Global Business Services ($14 million), Global Technology Services ($76 million) and Systems and Technology ($269 million) segments.
2007 Acquisitions
| ($ in millions) | ||
| Amortization Life (in Years) | Acquisitions | |
|---|---|---|
N/A — Not applicable |
||
| Current assets | $184 | |
| Fixed assets/noncurrent | 31 | |
| Intangible assets: | ||
| Goodwill | N/A | 999 |
| Completed technology | 3 to 7 | 93 |
| Client relationships | 3 to 7 | 91 |
| Other | 2 to 5 | 17 |
| Total assets acquired | 1,415 | |
| Current liabilities | (136) | |
| Noncurrent liabilities | (135) | |
| Total liabilities assumed | (271) | |
| Total purchase price | $1,144 | |
2006
In 2006, the company completed 13 acquisitions at an aggregate cost of $4,817 million, which was paid in cash. The cost of these acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents. The tables below represent the purchase price allocations for all of the 2006 acquisitions. The Micromuse Inc., FileNet Corporation, Internet Security Systems, Inc. and MRO Software, Inc. acquisitions are shown separately given their significant purchase prices.
Micromuse, Inc. (Micromuse) — On February 15, 2006, the company acquired 100 percent of the outstanding common shares of Micromuse for cash consideration of $862 million. Micromuse is a leading provider of network management software used by banks, telecommunications carriers, governments, retailers and other organizations to monitor and manage their sophisticated technology infrastructures. The software helps customers manage increasingly complex IT systems that support the proliferation of voice, data and video traffic due to the growing adoption of voice over IP (VoIP)-based audio and video services delivered over the Internet. The combination of Micromuse’s software and the company’s IT services management technology can provide a comprehensive approach to help customers reduce the complexity of their IT environments, lower operational costs and address compliance mandates. Micromuse was integrated into the Software segment upon acquisition and goodwill, as reflected in the table below, has been entirely assigned to the Software segment. The overall weighted-average useful life of the intangible assets purchased, excluding goodwill, is 4.0 years.
In the fourth quarter of 2006, as a result of completing the integration of Micromuse’s legal and intercompany structure into the company’s legal structure, the company recorded an increase in current assets and current liabilities with a corresponding offset in goodwill totaling $137 million. These increases relate to an increase in both deferred tax assets and current tax liabilities. These adjustments are reflected in the table below.
FileNet Corporation (FileNet) — On October 12, 2006, the company acquired 100 percent of the outstanding common shares of FileNet for cash consideration of $1,609 million. FileNet is a leading provider of business process and content management solutions that help companies simplify critical and everyday decision making processes and give organizations a competitive advantage. The FileNet acquisition enhances the company’s ability to meet increasing client demand for a combination of content- and process-centric business process management capabilities, which is driven by changing governance and compliance mandates, as well as the need to integrate content-centric business processes with enterprise applications. The company has integrated its business process management and service oriented architecture (SOA) technologies with the FileNet platform to allow customers to access content wherever it may reside and use it in the context of business processes. FileNet was integrated into the Software segment upon acquisition and goodwill, as reflected in the table below, has been entirely assigned to the Software segment. The overall weighted-average useful life of the intangible assets purchased, excluding goodwill, is 5.9 years.
Internet Security Systems, Inc. (ISS) — On October 20, 2006, the company acquired 100 percent of the outstanding common shares of ISS for cash consideration of $1,368 million. ISS provides security solutions to thousands of the world’s leading companies and governments, helping to proactively protect against Internet threats across networks, desktops and servers. ISS software, appliances and services monitor and manage network vulnerabilities and rapidly respond in advance of potential threats. The acquisition advances the company’s strategy to utilize IT services, software and consulting expertise to automate labor-based processes into standardized, software-based services that can help clients optimize and transform their businesses. ISS was integrated into the Global Technology Services segment upon acquisition and goodwill, as reflected in the table below, has been entirely assigned to the Global Technology Services segment. The overall weighted-average useful life of the intangible assets purchased, excluding goodwill, is 5.6 years.
MRO Software Inc. (MRO) — On October 5, 2006, the company acquired 100 percent of the outstanding common shares of MRO for cash consideration of $739 million. MRO’s asset and service management software and consulting services are used by many of the world’s top companies to effectively manage how they buy, maintain and retire assets — such as production equipment, facilities, transportation and information technology hardware and software — in a wide variety of industries including utilities, manufacturing, energy, pharmaceutical and telecommunications. The acquisition builds upon the company’s strategy to leverage business consulting, IT services, and software to develop repeatable tools that help clients optimize and transform their business. MRO was integrated into the Software, Global Technology Services and Global Business Services segments upon acquisition and goodwill, as reflected in the table below, has been assigned to the Software segment for $337 million, Global Technology Services segment for $49 million and Global Business Services segment for $122 million. The overall weighted-average useful life of the intangible assets purchased, excluding goodwill, is 5.6 years.
Other Acquisitions — The company acquired nine additional companies that are presented as “Other Acquisitions” in the table below. Three of the acquisitions were Global Services-related companies: two were integrated into the Global Technology Services segment: Viacore, Inc. and Palisades Technology Partners, LLP; the third, Valchemy, Inc., was integrated into the Global Business Services segment. Six of the acquisitions were software-related companies that were integrated into the Software segment: Cims Lab; Language Analysis Systems, (LAS) Inc.; Buildforge; Unicorn Solutions, Inc.; Rembo Technology; and Webify Solutions. The purchase price allocations resulted in aggregate goodwill of $211 million, of which $161 million was assigned to the Software segment and $51 million was assigned to the Global Technology Services segment. The overall weighted-average useful life of the intangible assets purchased in these acquisitions, excluding goodwill, is 3.4 years.
2006 Acquisitions
| ($ in millions) | |||||
| Micromuse, Inc. | |||||
|---|---|---|---|---|---|
| Amortization Life (in Years) | Original Amount Disclosed in First Qtr. 2006 | Purchase Adjustments* | Total Allocation | FileNet Corporation | |
|
* Adjustments primarily relate to acquisition costs, deferred taxes and other accruals. N/A — Not applicable |
|||||
| Current assets | $201 | $56 | $257 | $681 | |
| Fixed assets/noncurrent | 8 | — | 8 | 69 | |
| Intangible assets: | |||||
| Goodwill | N/A | 694 | 137 | 831 | 894 |
| Completed technology | 3 to 5 | 46 | — | 46 | 73 |
| Client relationships | 3 to 7 | 46 | — | 46 | 194 |
| Other | 2 to 4 | 4 | — | 4 | 55 |
| In-process R&D | N/A | 1 | — | 1 | 3 |
| Total assets acquired | 1,000 | 193 | 1,193 | 1,969 | |
| Current liabilities | (89) | (193) | (282) | (252) | |
| Noncurrent liabilities | (49) | — | (49) | (108) | |
| Total liabilities assumed | (138) | (193) | (331) | (360) | |
| Total purchase price | $862 | $ — | $862 | $1,609 | |
2006 Acquisitions
| ($ in millions) | ||||
| Amortization Life (in Years) | Internet Security Systems, Inc. | MRO Software, Inc. | Other Acquisitions | |
|---|---|---|---|---|
|
N/A — Not applicable |
||||
| Current assets | $309 | $227 | $28 | |
| Fixed assets/noncurrent | 62 | 20 | 4 | |
| Intangible assets: | ||||
| Goodwill | N/A | 967 | 508 | 211 |
| Completed technology | 3 to 5 | 135 | 71 | 8 |
| Client relationships | 3 to 7 | 60 | 42 | 22 |
| Other identifiable intangible assets | 2 to 4 | 21 | 4 | 4 |
| In-process R&D | N/A | 3 | — | — |
| Total assets acquired | 1,557 | 872 | 277 | |
| Current liabilities | (92) | (69) | (24) | |
| Noncurrent liabilities | (97) | (64) | (13) | |
| Total liabilities assumed | (189) | (133) | (37) | |
| Total purchase price | $1,368 | $739 | $240 | |
Divestitures
2008
In the fourth quarter, the company announced the sale of certain processes, resources, assets and third-party contracts related to its core logistics operations to Geodis. As part of this transaction, the company will outsource its logistics operations to Geodis which will enable the company to leverage industry-leading skills and scale and improve the productivity of the company’s supply chain. The company expects to record a gain when this transaction closes, which is anticipated to be in the first quarter of 2009.
2007
In January 2007, the company announced an agreement with Ricoh Company Limited (Ricoh), a publicly traded company, to form a joint venture company based on the Printing System Division (a division of the Systems and Technology segment).
The company initially created a wholly owned subsidiary, InfoPrint Solutions Company, LLC (InfoPrint), by contributing specific assets and liabilities from its printer business. The Printing Systems Division generated approximately $1 billion of revenue in 2006. The InfoPrint portfolio includes solutions for production printing for enterprises and commercial printers as well as solutions for office workgroup environments and industrial segments. On June 1, 2007 (closing date), the company divested 51 percent of its interest in InfoPrint to Ricoh. The company will divest its remaining 49 percent ownership to Ricoh quarterly over the next three years from the closing date. At December 31, 2008, the company’s ownership in InfoPrint was 24.4 percent.
The total consideration the company agreed to on January 24, 2007 (the date the definitive agreement was signed) was $725 million which was paid in cash to the company on the closing date. The cash received was consideration for the initial 51 percent acquisition of InfoPrint by Ricoh as well as a prepayment for the remaining 49 percent to be acquired and certain royalties and services to be provided by the company to InfoPrint. Final consideration for this transaction will be determined at the end of the three-year period based upon the participation in the profits and losses recorded by the equity partners. The company evaluated its ownership and participation in InfoPrint under the requirements of FIN 46(R). The company concluded that InfoPrint met the requirements of a variable interest entity, the company is not the primary beneficiary of the entity and that deconsolidation of the applicable net assets was appropriate. The company’s investment in InfoPrint will be accounted for under the equity method of accounting.
The company will provide maintenance services for one year, certain hardware products for three years and other information technology and business process services to InfoPrint for up to five years. The company assessed the fair value of these arrangements, and, as a result, deferred $274 million of the proceeds. This amount will be recorded as revenue, primarily in the company’s services segments, as services are provided to InfoPrint.
The royalty agreements are related to the use of certain of the company’s trademarks for up to 10 years. The company assessed the fair value of these royalty agreements, and, as a result, deferred $116 million of the proceeds. This amount will be recognized as intellectual property and custom development income as it is earned in subsequent periods.
Net assets contributed, transaction related expenses and provisions were $90 million, resulting in an expected total pre-tax gain of $245 million, of which $81 million was recorded in other (income) and expense in the Consolidated Statement of Earnings in the second quarter of 2007.
The deferred pre-tax gain of $164 million at the closing date was primarily related to: (1) the transfer of the company’s remaining 49 percent interest in InfoPrint to Ricoh, and, (2) the transfer of certain maintenance services employees to InfoPrint. The company will recognize this amount over a three-year-period as the remaining ownership interest is divested and the employees are transferred. The pre-tax gain will be recorded in other (income) and expense in the Consolidated Statement of Earnings.
