The consolidation in the security software market raged Wednesday with news that
Internet Security Systems
for $1.3 billion in cash.
At $28 a share, the price represents an 8% premium for ISS shareholders as of Tuesday's closing price. ISS investors cheered the news, and the stock popped 6.4%, adding $1.65 to $27.65. The company saw a healthy run on its stock last month on speculation that
IBM was eyeing ISS.
IBM shares barely moved, dipping 25 cents to $78.70 as the broader market turned lower.
"It's a good deal for everybody here," says security industry analyst Andrew Jaquith of the Yankee Group. "It's a good deal for IBM's customers and certainly a good deal for ISS."
Analysts agreed that the latest deal should bolster the security sector as a whole. Currently, "you have too many companies competing for market share," says Daniel Ives of Friedman Billings Ramsey, which makes a market in ISS. "As companies get bought and you have less players in the field, you should see more of the stand-alone vendors benefiting."
Val Rahmani, general manager of infrastructure management services for IBM Global Services, said in a statement that security and regulatory requirements have become "mission-critical" priorities for IBM clients. "This acquisition will help IBM to provide companies with access to trained experts and leading-edge processes and technology to evaluate and protect against threats and enforce security policies," she noted.
ISS, which is headquartered in Atlanta, has 1,300 employees who will join IBM. There will be no layoffs, the companies said. ISS CEO Tom Noonan will lead security operations in global services.
IBM has been gobbling up companies all summer long to boost growth. While acquisitions including
should give a lift to IBM's software business, the ISS bid will help the company in its global services division, which represents the bulk of IBM sales.
Global services "has become a drag on the rest of the company because its growth has been so sluggish," says Bob Djurdjevic, president of Annex Research, which owns IBM shares. "They needed to go on an acquisition binge. IBM global services has largely been absent from that game until today."
The last major purchase by IBM's global services unit was in 2002, when it bought PriceWaterhouseCoopers.
ISS's managed services division, in particular, is a good complement to IBM global services, analysts say.
It's been a healthy part of ISS's business, and "IBM is clearly going to be able to extend that and do a good job of scaling the heck out of it," Jaquith says.
"IBM will give ISS the scale, distribution and army of field reps to scale that technology to a broader customer base," Ives says.
IBM said it also plans to integrate ISS' software unit with IBM's Tivoli's division which includes software for identity management, access management, Service Oriented Architecture (SOA) security and security information management.
Jaquith says that move is logical but wondered "whether the specialization that ISS has developed (in that area) will survive unscathed." ISS has a strong focus on research and development, too, and he worries about talent flight.
Big Blue shareholders were pleased with the deal.
"We think it's a good acquisition for IBM," says Kim Caughey, senior equity research analyst with Fort Pitt Capital Group, which holds IBM shares. "It certainly does seem like they are really trying to pump up the system and network management area now."
"In the past, they have shown that they can integrate companies well and get value out of the acquisition," she added.
The transaction is expected to close in the fourth quarter.