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International Business Machines Corp. (IBM - Analyst Report) recently announced its plans to acquire Austin-based information management, compliance and electronic discovery software developer StoredIQ. However, IBM did not disclose the financial terms of the transaction. The acquisition is expected to close in the first quarter (January-March) of 2013.

Founded in 2001 as Deepfile Corp, StoredIQ changed its name in 2005. As per U.S. Securities and Exchange Commission (SEC) filings, the company received $11.4 million in funding from 12 investors in August 2012. StoredIQ has a strong clientele of 120 and has been named as one of the four 2012 Cool Vendors in risk management, privacy and compliance by market research firm Gartner.

Enterprises are always on the lookout for efficient ways to manage the vast amount of data that is generated during a business process. As per IBM estimates, 2.5 quintillion bytes of data are created every day from a variety of sources around the world, making it difficult for enterprises to analyze the data and navigate through it, which therefore impacts their competitiveness, efficiency and profitability.

StoredIQ develops software that helps in managing big data and serves a number of industries including healthcare. In contrast to some of its peers’ data management approach, StoredIQ software manages the data at the very place it was originally stored rather than moving it to another storage location. This saves a lot of secondary storage cost and mitigates the risk of data loss.

Data retention has become very important for enterprises due to increasing regulations and compliance requirements. Apart from legal needs, old data also helps companies to understand business trends, seasonal requirements and demand patterns. StoredIQ software analyzes data, identifies the important ones for storage purpose and deletes the rest.

This again not only saves storage cost but also helps enterprises to quickly access important information from a heap of data within a very short span of time. Moreover, compared to most software, StoredIQ is much easier to install.

IBM intends to integrate StoredIQ in its software business as a part of its Information Lifecycle Governance suite, which comprises PSS Systems (2010) and Vivisimo (May 2012). The current acquisition complements these earlier acquisitions by expanding IBM’s product offering in the big data management market, with keen focus on the legal and regulatory sector.   

Big Data management provides significant growth opportunity over the long term. According to market research firm IDC, the Big Data market is expected to reach $16.5 billion by 2015, growing 40% annually from $3.2 billion in 2010. We believe that the StoredIQ acquisition places IBM in a stronger position to capitalize on this opportunity going forward.

We expect IBM to continue to pursue strategic acquisitions (10 acquisitions year-to-date at an aggregate cost of $2.61 billion) that can be easily integrated into its current business, thereby expanding its product portfolio in higher-growth segments, such as smarter commerce, business analytics and security. The acquisitions are also increasing its global scale. IBM plans to spend approximately $20.0 billion on acquisitions over the next five years, which are expected to contribute 90 cents in earnings per share each year.

However, significant competition from other vendors such as EMC Corp. (EMC - Analyst Report), Oracle Corp. (ORCL - Analyst Report) and SAP AG (SAP - Analyst Report) and sluggish enterprise spending keeps us on the sidelines. Thus, we maintain our Neutral recommendation over the long term.

Currently, IBM has a Zacks #3 Rank (Hold).

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