Even With Lotus Stake, IBM Woes Would Remain : News analysis: Deal could produce a player with the clout to compete against Microsoft. But history doesn’t bode well.
A resurgent IBM Corp.’s hostile bid for Lotus Development Corp. will accelerate consolidation in the computer software business and, if consummated, could eventually produce a powerful new player with the technical ability, product range and financial clout to stand up to dominant Microsoft Corp., industry analysts said Monday.
But while Lotus would give IBM a major stake in the personal computer software business, the computer giant would face huge challenges in exploiting that stake. It must first digest a company long managed by strong and fiercely independent Chief Executive Jim Manzi. And it must operate in a competitive climate where it has previously proved itself inept.
How well the now-slimmer but still plodding IBM uses Lotus to become competitive in the fast-paced personal computer software business could be a harbinger of how well Chief Executive Louis V. Gerstner Jr. can transform the company to meet a changing environment. And it could be a sign of whether it is possible today to mount a direct challenge to Microsoft.
Certainly an IBM-Lotus combination would have one big advantage in the rapidly evolving software business: size.
“We’re in the mature phase [of the software industry] where technology isn’t enough anymore,” says Jesse Berst, editor of the Bellevue, Wash.-based newsletter Window Watcher. “The big are getting bigger and the small stay small. It’s hard to compete in the middle.”
Berst sees the emergence of two or three powerful software companies that will act as “suns” (companies with a broad range of offerings, such as Microsoft and Novell) around which planets (companies with strong niches, such as Intuit) and hundreds of tiny asteroids will orbit. In this environment, a few core products--Microsoft’s Windows being the best example--creates the gravitational pull that helps drive a constellation of other products.
Lotus, once a powerhouse, is looking increasingly like a dying sun. It has a broad product line, including the once-dominant spreadsheet program Lotus 1-2-3 and Notes, a popular program widely used in large corporations to help employees work closely together. But the company doesn’t have the money or the marketing power to back its products in competition with the likes of Microsoft.
IBM has $10 billion in cash. It has an international distribution system that is the envy of every multinational. And with Lotus it would have, in the Notes product, a core offering around which many other pieces of software could be designed--the same way that Microsoft applications work hand-in-glove with the Microsoft Windows operating system.
“When you’re competing for mind share, you need something for the software customer to identify with,” says Patricia Seybold, president of the Boston area-based Patricia Seybold Group. Notes could become the core backbone around which IBM could build an attractive offering, she says.
A range of applications built around Notes and running on OS/2--IBM’s technically respected but slow-selling competitor to Windows--could be the only way to save OS/2, which many in the industry have given up for dead despite IBM’s persistence.
Customers also say they would be more comfortable buying Lotus products with IBM’s strong backing.
“As a manager, if you know you have a strong company with an international infrastructure [behind the products you buy], you can sleep at night,” says Colin St. Rose, a senior computer engineer at Sony Music Entertainment Co. who likes Lotus products but complains about the service.
IBM “will have everything they need to be a software giant if they can get their hands on Lotus,” he says.
But there are many potential problems, beginning with the age-old problem of managing conflicting interests within the computer giant. IBM managers in charge of products that compete with Lotus reportedly fought against the hostile bid.
Experts say IBM damaged the chances of turning its PowerPC microprocessor into a strong competitor to Intel products by developing the microprocessor for its own OS/2 software before adapting it for Windows NT, Microsoft’s competing system. If IBM similarly tries to use Notes to push its own hardware or its own operating system, the computer maker could sink its chances of making Notes a new standard.
To wend its way through such land mines, IBM needs more than just money and good products.
“What both companies need is strategic vision,” says Berst. “They aren’t getting any of that” with the acquisition.
Gerstner has boosted IBM’s profit by sharply cutting costs, but he has been less successful on his mission to reduce IBM’s dependence on the shrinking mainframe computer business. IBM has lost its leadership position in the fast-growing personal computer business to Compaq.
And IBM has a very bad history when it comes to managing software operations. Not only did it lose the operating system business to Microsoft, it has also failed consistently in trying to create good applications of its own.
Previous acquisitions have not worked out well, either. In the late 1980s, IBM took major stakes in half a dozen personal computer software companies, including Metaphor Corp. IBM’s overbearing, bureaucratic manner quashed innovation at those companies and most were unsuccessful.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Software Consolidation
If IBM is successful n its $3.3-billion hostile takeover of Lotus Development Corp., the merger will be the largest ever in the software industry. Other large acquisitions in the industry include:
* May, 1995: Computer Associates International Inc., the leading maker of mainframe computer software, agrees to buy Legend Corp. for $1.78 billion.
* February, 1995: Sybase Inc., a vendro of database software agrees to purchase Powersoft Corp., a maker of tools for creating databases, in a stock transaction valued at $875 million.
* July, 1994: Adobe Systems Inc. agrees to merge with Aldus Corp. in a $450-million deal, marrying two leaders in desktop publishing software.
* June, 1994: Novell Inc., maker of computer-networking software, agrees to pay $855 million for word-processing giant WordPerfect Corp.
* July, 1991: Borland International spends $440 million to acquire Ashton-Tate, the developer of dBase database program and one of the software industry’s biggest companies.
The Market
Total PC software market share for 1994, based on worldwide revenues:
Other: 42.7%
Microsoft: 36.3%
Lotus: 8.8%
Novell: 7.5%
Adobe: 4.7%
*
Sources: Associated Press, Dataquest, Times Reports
