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IBM Picks Up Cognos

IBM's (IBM - Get Report) $5 billion acquisition of Cognos (COGN) is the company's largest takeover in its history, and underscores the importance that software plays in reaching its long-term financial goals.

The deal adds to a series of acquisitions and upgrades aimed at moving IBM's mature software business onto a growth track. The company hopes that sales of business applications will grow to account for 50% of total pretax earnings by 2010, which can help it boost annual earnings per share to $11 from $6.06 in 2006.

"The transaction wasn't entirely unexpected, and fits with the company's plans to move into higher margin software and services business," said Tony Trzcinka, a portfolio manager with Pax World. Pax holds about 30,000 IBM shares in its growth fund, accounting for about 2.5% of assets.

During a conference call with the press, IBM said it expects to receive shareholder and regulatory approval during the first quarter. The company would not say how the deal will affect its 2008 earnings.

Acquisitions have played an important role in helping IBM transition away from commodity hardware businesses into higher margin business. Since Sam Palmisano became chief executive and chairman, IBM has spent $17.2 billion to acquire 61 companies, with software companies accounting for 38 of those transactions.

Also, IBM has tried to make its business software more attractive by features like instant messaging, blogging and user profiles that mimic social networking sites like Facebook and News Corp.'s (NWS - Get Report) MySpace.
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