Lotus OKs a Takeover by IBM for $3.5 Billion : Technology: The deal, if completed, will create a software giant. Antitrust clearance by FTC expected.

TIMES STAFF WRITER

The computer software industry's first big hostile takeover battle ended swiftly Sunday when Lotus Development Corp. agreed to be acquired by IBM Corp. for $3.5 billion, or $64 per share--a modest premium over the $60 per share that IBM had offered just six days earlier.

In accepting IBM's sweetened offer, Lotus and its strong-willed chairman, James P. Manzi, were bowing to the simple reality that IBM was willing to pay twice what Lotus shares had been trading for on the open market--and no other similarly free-spending suitor was on the horizon.

The deal, if completed, will create a formidable new competitor in the software business, marrying IBM's muscle and strong presence in corporate computing markets with Lotus' PC software technology, most importantly a product called Notes. The combination is still subject to antitrust clearance by the Federal Trade Commission, but most observers expect the deal to be completed.

"Lotus will be a very critical and important part of IBM and IBM's growth strategy," IBM chairman Louis V. Gerstner Jr. said Sunday. Together, industry analysts said, IBM and Lotus should be well-positioned to battle it out with software leader Microsoft Corp.

Contrary to what those close to him had expected, Manzi said he will stay on to run Lotus as a free-standing subsidiary of IBM. He stressed that IBM had agreed to keep Lotus' liberal personnel policies in place and otherwise allow Lotus to run its own show, agreements which he said were crucial in persuading him to support the deal.

"In the process of these negotiations, we have taken care of the employees, our shareholders, and very importantly our customers," Manzi said. "Our intention is to move quickly to bring the value of this combination to the marketplace."

Manzi will become a senior vice president of IBM, reporting directly to Gerstner.

Although cynics were quick to assert that Manzi will probably stay on only for a transition period, gaining the Lotus chief's support--and thereby turning a hostile takeover into a friendly merger--was an important achievement for IBM. There is now much less risk that key employees will depart, and there is no danger of a protracted takeover battle that could disrupt Lotus' operations.

Manzi's quick acceptance of a friendly deal did not look likely on Monday, when IBM launched its surprise $3.3-billion bid. Miffed that he was informed only five minutes before a public announcement and feeling betrayed by Gerstner's decision to proceed against his wishes--Lotus had supported IBM through tough times for both companies--Manzi sounded like a man ready to fight.

"He was just steamed," said one source close to Manzi. Soon, the Lotus chairman was making frantic calls to potential white knights, including AT&T.; But IBM's offer, roughly twice the $32.50 at which Lotus' stock closed a week ago Friday, was considered generous, and no one was willing to bid against IBM and its cash reserves of $10.5 billion.

On Tuesday, Manzi called Gerstner, and--after "a short trip to St. Patrick's Cathedral," as he recounted Sunday--he went to Gerstner's New York apartment. The meetings continued on Wednesday, and Manzi soon began seeing the merits of a combination with IBM. Since Thursday, representatives for both companies have been hunkered down in New York hashing out details of the deal.

"Ultimately, Jim is a pragmatist," said an executive close to Manzi. "Once he realized that this was the only option, he was going to negotiate the best deal for Lotus investors, employees and himself."

Indeed, most analysts say the merger makes a lot of sense. The two companies have had a long and close relationship: the Lotus 1-2-3 spreadsheet was the first big hit for the IBM personal computer, and Lotus has continued to develop software for IBM's OS/2 operating system even after others abandoned it in favor of Microsoft Windows.

And IBM is perhaps the ideal company to exploit the opportunities presented by Lotus Notes, a software program that enables groups of people to share documents and otherwise work together electronically. This type of software, known as groupware, is one of the few major segments of the software business that Microsoft is not positioned to dominate.

But making Notes into the groupware standard for large corporations requires two things that IBM has and Lotus lacks: money, and a sales force skilled in selling to the corporate world. Wounded by its battles with Microsoft, Lotus has found itself with dwindling resources to promote Notes: It posted a $17.5-million loss last quarter as revenue from Notes failed to compensate for rapidly declining sales of 1-2-3.

"This serves up some very big opportunities that we didn't have before," Manzi acknowledged on Sunday.

"It's good news all the way around for everybody," agreed Bill Milton, a Brown Brothers Harriman analyst. "The concern was that Lotus would lose its autonomy and its culture," Milton said, adding that Manzi's decision to stay and run Lotus was a major positive.

Lotus sources said many employees, worried by the company's poor financial performance of late and happy to cash in their stock holdings, were delighted by the prospect of a buyout.

Making the combination work, however, will be no easy trick. Manzi, who stands to take down nearly $78 million in selling his Lotus shares to IBM, has a decidedly mixed record as a manager, and it's far from clear how he and Gerstner and the other members of IBM senior management will mesh.

IBM, for its part, has a bad record in managing arms-length relationships with smaller companies especially software companies. In the late '80s, IBM formed alliances with five PC software companies as part of its Desktop Software group. By 1992, IBM dissolved its partnerships, conceding that the experiment had failed. The companies, like Platinum Software Corp., complained that working with IBM was smothering.

And large mergers such as this one, especially in the high-tech sector, are always fraught with peril, analysts say. AT&T;'S buyout of the NCR computer company, for example, has been a big disappointment.

The success or failure of the merger may depend on the chemistry between Manzi and Gerstner, both former consultants at McKinsey & Co.

Manzi has been firmly in control of Lotus since 1986, when company founder Mitch Kapor left. It has been a rocky ride on the management front, with repeated waves of executive defections.

"He's not very good at building teams," said Frank King, a former Lotus vice president who spent 19 years at IBM.

Among his peers in the software industry, Manzi is known as something of a loner. And his track record as Lotus' chief strategist is also mixed. It was under Manzi's watch that Lotus lost its edge on spreadsheets to Microsoft, largely as a result of its stubborn refusal to develop versions for the Microsoft Windows operating system until much later than most other companies.

On the other hand, Manzi had the foresight to invest in Notes when few thought it was a worthwhile product, and he has done well in securing the loyalty of the crucial Notes development team and its leader, Ray Ozzie.

Observers said he may well view the chance to be a major player inside IBM as an new opportunity, with some speculating that Manzi might eventually have the chance to run all of IBM's personal computer businesses. Although Gerstner was noncommittal about it Sunday, it's possible that some of IBM's other PC software operations will be transferred to Lotus.

"Manzi was trying to take something Mitch Kapor created--the 1-2-3 company--and turn it into the Notes company," King said. "The clock ran out. The question still is: Can Notes become a $1-billion business? Maybe IBM can do a better job at answering that question. It certainly can put a lot more money behind it than Lotus."

* IBM's SOFTWARE STRATEGY: Lotus deal is the first step in challenging Microsoft. D1

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Can They Get Along?

The success of IBM's $3.5-billion buyout of Lotus Development Corp. will depend largely on the relationship between IBM Chairman Louis V. Gerstner and Lotus Chairman James P. Manzi, who has agreed to stay on after the merger.

LOUIS V. GERSTNER, Chairman and chief executive, IBM Corp.

Age: 53

Education: MBA, Harvard.

Previous Experience: Chairman of RJR Nabisco. President of American Express. Consultant for McKinsey & Co.

Reputation: Considered a strong financial manager, he gets credit for reversing IBM's long slide. But many remain wary of his lack of technical expertise.

****

JAMES P. MANZI, Chairman and chief executive, Lotus Development Corp.

Age: 43

Education: Master's in economics, Fletcher School of Law and Diplomacy.

Previous Experience: Marketing director, Lotus Development. Consultant for McKinsey & Co. Reporter for Gannett Newspapers.

Reputation: He had the forsight to invest in Notes software, now Lotus' biggest asset. But he has squandered other opportunities and is often criticized for erratic management.

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Software deals

The merger of IBM and Lotus Development Corp. would be the largest in software industry history. A look at the five biggest buyout deals involving software companies:

1. IBM bids for Lotus Development Corp., $3.54 billion, June, 1995

2. Computer Associates International Inc. seeks to acquire Legent Corp., $2.1 billion, May, 1995

3. Novell Inc. acquires WordPerfect Corp. and some assets of Borland International Inc., $1.4 billion, March, 1994

4. Sybase Inc. acquires Powersoft Corp., $940 million, February, 1995

5. Pearson PLC acquires Software Toolworks Inc., $462 million, April, 1994

Source: Associated Press

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