IBM Bids for Netezza

A premier Information Technology (IT) services provider, International Business Machines Corp. (IBM - Analyst Report) has agreed to acquire data warehouse company Netezza Corp. (NZ) in an all cash transaction of $1.70 billion or $27.00 per share.

The price of $27.00 per share reflects a 9.8% premium on September 17 closing price of Netezza of $24.60. Following the acquisition bid, Netezza’s share price rose $3.67 or 14.92% to $28.27. IBM’s offer values Netezza at 8.9 times of sales ($190.6 million) in its fiscal year that ended in January, 2010.

IBM expects to wrap up the deal by the fourth quarter. The merger is subject to Netezza shareholder approval and regulatory clearances.

Marlborough, Massachusetts based Netezza is a leading company in data warehousing technology. The company makes computer appliances that integrate hardware and software for analyzing a huge amount of data in a quick and efficient manner.

Business analytics/intelligence has gained significant growth in recent times. With a rapid increase in data volumes, organizations are trying to process information on the run at a very short span of time, rather than fetching it from a database. This process calls for high interaction between software and hardware.

IBM has been working on the analytics field for sometime with its System S technology. Since 2005, IBM has invested $10.0 billion in 14 strategic acquisitions (including Cognos in 2007 and SPSS in 2009) to build its business analytics portfolio. Currently, IBM holds 14.5% share of the market, following SAS Institute Inc.'s 33% share.

Most recently, IBM bought OpenPages, a provider of risk management software. Analytics posted a strong growth in the second quarter of 2010 (most recent quarter), which was up 14.0% year over year.

Netezza recorded a robust revenue growth, up 45.0% year over year in the second quarter. For the current fiscal year 2011, Netezza expects sales of $250.0 million, implying that IBM’s bid is 6.8 times of projected sales. Netezza has a strong clientele, including noted names like Virgin Media Inc. (VMED), Time Warner Inc. (TWX - Analyst Report), Neiman Marcus and NYSE Euronext Inc (NYX - Analyst Report).

We believe this acquisition will provide a fillip to IBM’s business analytics capabilities, driving revenue growth over the long term. Moreover, the acquisition is expected to boost IBM’s competitive capabilities in the data warehousing market where it faces significant competition from Oracle Corp. (ORCL - Analyst Report).

According to IDC, the cloud will drive 19% of additional growth in software spending by 2013–2014. Additionally, IDC forecasts cloud spending to grow five times faster than all applications spending. We are of the opinion that the acquisition will help IBM gain share in the cloud computing market as managing large amount data has become an integral part of businesses.

However, the acquisition may face significant hurdles as analysts expect competitive bid from companies such as Hewlett Packard Co. (HPQ - Analyst Report), Oracle and Dell Inc. (DELL - Analyst Report), since Netezza is currently trading over IBM’s bid value.

Oracle, a leader in the data warehousing market, could refrain itself from bidding its rival Netezza as it currently remains focused on integrating Sun Microsystems that was acquired in January this year to its own business line. Oracle is busy bringing Sun back to a profitable mode.

However, we expect H-P and Dell to be strong contenders for Netezza. Recently, H-P and Dell were involved in a bitter bidding war for Data Storage Company 3PAR Inc. (PAR), which H-P eventually won for a whopping $2.35 billion; a price which according to some analysts was excessive.

Recently, HP also bought the network security company ArcSight Inc. for $1.5 billion. IBM has criticized HP for the deals, considering that HP paid an exorbitant price for both of them.

Despite an impending $10.0 billion share buyback deal and the recent acquisitions, we believe H-P may bid for Netezza, with an aim to revive its data analytics division. With a strong balance sheet and cash generation of approximately $3.30 billion each quarter, H-P is well positioned to add Netezza to its growing acquisition spree.

Despite losing 3PAR bidding war, analysts speculate that Dell may target other companies (including Netezza) such as Teradata Corp. (TDC - Analyst Report), CommVault Systems (CVLT - Snapshot Report) , Isilon Systems (ISLN) and Compellent Technologies (CML).

If a rival bid surfaces at a higher valuation, we believe IBM may drop its bid based on its strategy of buying companies at a reasonable valuation.

IBM continues to proceed with its strategy of accretive acquisitions and plans to spend approximately $20.0 billion in acquisitions over the next 5 years.

IBM has a Zacks Rank of #3, which implies a Hold rating on a short-term basis (1-3 months). Over the long term (6-12 months), the stock has a Neutral recommendation.