IBM Pays More Than SAP and Oracle for Cloud Growth (Update 1)

Updated to reflect IBM comments

NEW YORK (TheStreet) -- The cloud services that DemandTec(DMAN) offers will mesh with existing businesses and benefit from IBM's(IBM) ability to take the business to 170 countries where it does business, an IBM executive says.

"We go for businesses in adjacent markets with strong synergies," says Yuchun Lee, an IBM vice president who covers marketing technology for IBM's Smarter Commerce initiative.

IBM said Thursday that it would buy DemandTec for $13.20 a share, a 57% premium, in a push to bolster its cloud offerings for business users.

"I think we paid a fair price," says Lee of the deal.

In characteristic form, IBM expects that its existing business will dramatically boost DemandTec's products, which it's paying $440 million net of cash for.

After news earlier in December that SAP(SAP) will buy cloud-player SuccessFactors(SFSF) for $3.4 billion at a 52% premium, IBM is demonstrating a continued cloud appetite that's pushing up premiums even if targets won't bring immediate profits.

In October, Oracle(ORCL) bought Right Now(RNOW) for $1.5 billion at a 19.6% premium, the only profitable company of the three, signaling that tech giants are jumping into cloud deals at increasingly higher prices.

IBM Buys DemandTec in Cloud Push

IBM is keen to add cloud services as part of its Smarter Commerce initiative announced in March 2011 to help business customers access analytics ranging from marketing trends, pricing and point of sale data.

With DemandTec, IBM will bring in a company that specializes in identifying consumer trends, which give retailers the ability to make data-informed decisions on pricing at near real-time speeds.

According to Lee, the Smarter Commerce initiative was first talked about within IBM in early 2009. With acquisitions like a 2010 purchase of Sterling Commerce from AT&T(T) for $1.4 billion and a purchase of privately-held Coremetrics later in the year, IBM built the base for Smarter Commerce, which Lee says also had a foundation from IBM's existing WebSphere commerce applications. The initiative is also bolstered by Lee's own entrepreneurial efforts.

Lee founded Web analytics giant Unica in 1992 and later sold it to IBM in 2010 for $480 million -- giving it one of the starting pieces in a campaign to help businesses find "smarter" ways to connect with consumers using software, analytics and cloud capabilities. While still small within the whole company, "Big Blue" high expectations for Smarter Commerce.

Cloud-based businesses and analytic abilities are becoming increasingly important to IT services and software giants as consumers and businesses make more smartphone-based decisions using mobile networks.

Overall, IBM sees that the market for cloud-based business decisions could net the company $20 billion in software sales alone. DemandTec's $82.4 million in annual cloud sales will be integrated within IBM's mammoth $22.5 billion-selling software unit, which turned a $9.1 billion profit in 2010.

In a recent earnings announcement, IBM CFO Mark Loughridge said that the Smarter Commerce unit doubled revenues year-over-year and contributed significantly to the overall software division's 13%-plus earnings growth.

While DemandTec hasn't yet turned a profit since going public in late 2007, IBM likely believes it can wrench out synergies within the cloud businesses it's picking up, in addition to 31 patents related to consumer pricing analytics, which may be of value to R&D efforts like its newly established Services Innovation Lab.

Though IBM, at first glance, appears to be paying the biggest premium for cloud growth among its blue chip software and services competitors like SAP and Oracle, the deal may actually reflect a bit of opportunism. Even after a 55% spike in DemandTech's shares on Thursday's deal announcement, the company's stock sits at just over $13 a share, below 2011 highs of $14.08 -- and a 2007 post-ipo spike to nearly $20 a share.

In past deals, IBM has a track record of generating growth channels by picking up companies big and small and integrating them into its $100 billion selling software, services and systems businesses.

Earlier in 2011, IBM also bought Algorithmics for $387 million and i2 for an undisclosed price, both to bolster analytics capabilities.

"IBM will continue to support and enhance DemandTec's technologies and clients while allowing them to take advantage of the broader IBM portfolio," the company said in a press release. The company will likely continue to try use analytic software on and off of clouds to help customers better match merchandise with their supply chains and marketing efforts.

IBM believes that the analytics businesses it's bolstering with DemandTec should give customers an, "instant return on investment." Still to be seen is whether the acquisition will provide such a quick return within IBM.

Currently, DemandTec has approximately 450 customers worldwide in retail, consumer products and other industries in addition to 350 employees, according to a press release announcing the deal.

"Bringing science to the art of pricing and promotion is a big part of this strategy, and the combination of DemandTec and IBM will help marketing and sales executives in retail and other industries drive more revenue and increase profitability," said Craig Hayman of IBM in a press release announcing the deal.

DemandTec started its cloud-based marketing and pricing business with cloud-based applications for retail pricing over a decade ago, according to its Web site. Since then, it's partnered in providing analytic services to IT and consulting giants like IBM, Accenture, Deloitte, Booz Allen Hamilton & Co, Nielsen and PriceWaterhouseCoopers.

"IBM Smarter Commerce is the perfect fit for DemandTec. IBM is the only provider of price and promotion offerings within a rich solution set that supports companies' buy, market, sell and service processes," said DemandTec Chief Executive Dan Fishback.

The deal is expected to close in the first quarter of 2012, according to a press release.

-- Written by Antoine Gara in New York

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