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International Business Machines Corp. (IBM - Analyst Report) has completed the $1.3 billion acquisition of Kenexa. IBM had agreed to buy Kenexa in August 2012. Kenexa develops software that helps enterprises manage human resources (“HR”). Its HR solutions are widely popular and its strong client base consists of approximately 8,900 customers across a number of industries.

The Kenexa acquisition will further expand IBM’s business analytics software offerings going forward. The acquisition is a major strategic move by IBM to bolster its position in the cloud based software-as-a-service (“SaaS”) market. SaaS is a software delivery method that enables data access from any device with an Internet connection and web browser. In this web-based model, software vendors host and maintain servers, databases and codes that constitute an application.

Moreover, demand for SaaS-based products has been on the rise for some time and is expected to increase manifold because of some inherent benefits associated with the platform. Applications delivered over the SaaS platform not only allow enterprises to start using them instantly, but they are also more cost effective compared to traditional products installed at a customer’s onsite data center. Software updates are also smoother.

IBM is already a leader in enterprise social software, according to IDC. Moreover, IBM’s solutions cater to approximately 60% of the fortune 100 companies. We believe that the growth prospects in the SaaS segment is the primary factor attracting IT giants, such as IBM, Oracle Corp. (ORCL - Analyst Report), Salesforce.com (CRM - Analyst Report) and SAP AG (SAP - Analyst Report). Both SAP and Oracle enjoy a leading position in the SaaS-based application market based on a number of acquisitions (SuccessFactors, Ariba, RightNow, Taleo) in the recent past.

We believe that IBM’s entrance into the cloud-based HR solutions market will intensify competition going forward. Although it is very difficult to predict a clear winner among these companies considering the depth of their product portfolios and diversified customer base, we believe that IBM has an advantage due to its strong balance sheet. IBM intends to spend $20 billion on acquisitions up to 2015.

Thus, we remain Neutral over the long term. Currently, IBM has a Zacks Rank #3 (Hold).

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