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IBM Set to Buy Kenexa

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IBM Corp. (IBM - Free Report) recently signed a definitive deal to acquire Kenexa Corp. for approximately $1.3 billion in cash or $46.00 a share. The deal is expected to close in the fourth quarter of 2012.

Wayne, Pennsylvania-based Kenexa develops software that helps enterprises manage human resource (“HR”). Its HR solutions are widely popular, which is reflected in its strong client base that consists of approximately 8,970 companies across a number of industries. In the recently concluded second quarter of 2012, Kenexa reported earnings of 28 cents on revenues of $86.3 million.

Kenexa is IBM’s 10th acquisition in 2012. The company completed eight acquisitions in the first half of 2012, spending approximately $2.21 billion. Most of the acquisitions were relatively small companies except DemandTec, for which IBM paid $440.0 million.

It is noteworthy that most of the acquired companies offer analytical products, a market on which IBM has been focusing for some time. According to Bloomberg, IBM has spent $16.0 billion on 30 analytics acquisitions over the last five years.

IBM expects business analytics to generate $16.0 billion in revenues by 2015. For further details, please see IBM to Focus on Analytics This Year.

The Kenexa acquisition will further expand IBM’s business analytics software offerings going forward. The acquisition is widely seen as a major strategic move from 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.

Demand for SaaS-based products have 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 also prove more cost effective compared to traditional products installed at a customer’s onsite data center.

Moreover, SaaS applications are more scalable and they can be continuously upgraded unlike traditional products where upgrading is something of a hassle. According to market research firm Gartner, sales of online software, which touched $12.3 billion in 2010, is expected to more than double to $22.1 billion by 2015, much faster than traditional software.

The staggering growth prospect is the primary factor attracting IT giants, such as IBM, Oracle Corp. (ORCL - Free Report) , (CRM - Free Report) and SAP AG (SAP - Free 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 the entrance of IBM in 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 depths of their product portfolios and diversified customer base, we believe that IBM has significant advantage due to its strong balance sheet. IBM intends to spend $20 billion till 2015 on acquisitions.

Thus, we remain Neutral over the long term. Currently, IBM has a Zacks #3 Rank, which implies a Hold rating in the near term.

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