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Boston Corporate Finance View of the IBM Acquisition of ISSX

  • August 28 2006, 1:00am EDT
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Some thoughts from Boston Corporate Finance on the IBM acquisitionof ISSX.

"We like this [acquisition]," said Murray Beach, President of M&A International, and managing director of Boston Corporate Finance (, an M&A technology firm. "IBM continues to move boldly, rounding out its software offerings in the application management and security space. When combined with the Tivoli line and MRO software, IBM has created a very robust application/system management platform. IBM is advancing on a strategy to automate and standardize business processes across the enterprise using a hybrid software and services model, and ISSX's security expertise will help provide the important security aspect to this plan.

We also find IBM's desire to build out its managed services offering attractive. We see legs in this space, particularly in the secure managed services. Sticky revenue is important to an organization of any size. As we have seen before, you need both software expertise and global services capabilities to make Managed Services chug. IBM provides this. We also like ISSX's customer list. While expensive, you need to pay up for strong targets, particularly when they touch upon a variety of your core strategies moving forward."

Other views from BCF:

From a 30,000 foot strategic perspective, this acquisition falls in line with IBM's stated strategic direction- increase software revenues through acquisition of leading players tangential and complementary to where play. In this sense it follows IBM's latest string of acquisitions, including Filenet, MRO and Webify

ISSX is a leading intrusion prevention/detection software provider, considered to be the #2 player in the landscape behind Cisco and ahead of players like McAfee and Symantec. While intrusion detection is becoming highly commoditized, intrusion prevention is one of the security's current darlings, with a CAGR in excess of 15 percent. In addition to Intrusion prevention, ISSX offers integrated security software platforms (unified threat management) and content security software, two additionally hot security areas

IBM will most likely push ISSX products into its Tivoli line, creating a robust application management and business system management platform (together with MRO's products) that is highly secure and extremely competitive with whatever competitors can throw at it (BMC, Serena, Attachmate/NetIQ, Symantec).

Intrusion prevention is also a key component of any secure managed services offering. This was a hole IBM had in its offering and should help bolster their ability to drive hard into space. This is a key point, as managed services sits at the cross roads of IBM's software capabilities and its global services arm. Similar to what we had seen with CC, you need to have both the software expertise and the services/consulting capabilities to be successful at managed services

In addition to complementary product platforms, ISSX is best known for its customer list. ISSX counts as customers 17 of the world's largest banks, 15 of the largest governments, 11 top public insurance companies and 13 of the world's largest IT organizations. So this is a huge customer play for IBM and cross selling potential should be strong. One article pointed out Ford as a large ISSX customer

Deal metrics- IBM paid $28/share for ISSX, representing about an 8 percent premium to yesterday's close price. When it all shakes out we're looking at 3.9x TV/LTM revenue and 16.7x TV/LTM EBITDA. From an implied EV perspective, we're looking at 3.2x rev and 13.8x EBITDA. This is by all means fairly expensive, and if there's going to be a knock on IBM, its going to be that it overpaid. This spicy valuation comes in the midst of two consecutive quarters of missed revenues and lightened profitability.

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