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IBM Agrees to Acquire FileNet of Costa Mesa for $1.6 Billion

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Times Staff Writer

IBM Corp. said Thursday that it would buy Costa Mesa-based FileNet Corp. for $1.6 billion in cash as the technology giant expands its software offerings.

But FileNet stock jumped above IBM’s offer price of $35 a share, indicating that some on Wall Street expect a bidding war for the maker of software that helps companies manage data traffic.

IBM’s offer represented a slight premium to FileNet’s closing price Wednesday of $34.65. The shares closed Thursday at $36.17, up $1.52.

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“I think there could be other interested parties here,” said David A. Shore, a software and gaming analyst for Desjardins Securities. Shore identified Oracle Corp., SAP, Microsoft Corp. and Hewlett-Packard Co. as potential suitors.

The FileNet acquisition would be IBM’s largest since the $2.1-billion purchase of Rational Software Corp in 2003 and the fourth-largest in the company’s long history. It didn’t come as a surprise to many analysts, who said the deal fit IBM’s strategy.

“IBM has been building its software division over the last five years and has done so by acquiring companies slowly and surely,” said analyst Eric M. Ross of ThinkEquity Partners.

FileNet, which has about 1,760 employees, makes software that helps companies sort, store and share documents on in-house computer networks and the Internet. The company, founded in 1982, had $421.8 million in revenue last year.

FileNet Chairman and Chief Executive Lee D. Roberts, 53, said his firm operates in 92 countries and has about 4,300 customers, including 81 of the Fortune 100 companies, but he added that IBM’s global reach would help FileNet enter new markets.

“We have a very strong foothold in very major businesses, which is part of the reason IBM was interested in us. We are critical to a lot of corporations,” said Roberts, who is a former IBM executive.

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Thursday’s announcement followed a recent run-up in FileNet stock, which closed Monday at $35.28. Over the last year, the shares traded in a range between $25 and $30. They started climbing in late July, as rumors that FileNet might be bought began circulating.

“There will definitely be speculation that somebody knew something,” Shore said.

Michele Wein Layne, associate regional director for the Securities and Exchange Commission, would not comment on possible investigations.

But she added: “Generally, we look at any unusual activity in stock prices before any significant news,” such as a big acquisition.

Roberts said there was a “minimum number of people” involved in the deal and that he had a “high degree of confidence that there was no leak” from his side.

He offered a possible explanation for the run-up: “This particular space has been an area of speculation for a long time. In the last two or three years, we and other companies have been targeted for acquisitions.”

If the deal meets shareholder and regulatory approval, FileNet would merge with IBM’s content management unit. Roberts said he expected “minimal headcount reductions” as FileNet is integrated.

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The deal, expected to close in October, would be the 38th acquisition for IBM’s software group since 2001. On Aug. 3, IBM agreed to buy MRO Software Inc. for $740 million, and on Aug. 2, IBM said it had bought privately held Webify Solutions for an undisclosed price.

Shore said FileNet “has a very good market position in financial services, insurance and government,” industries IBM would like to penetrate further.

Both sides said a union would complement what each company offers. For example, IBM can sell consulting services to companies that buy FileNet’s software.

IBM spokesman Christopher Rubsamen said clients would benefit from the merged company’s “breadth of offerings.”

“When you combine the products,” Roberts said, “you end up with 1 plus 1 equals 3. We both benefit by providing capabilities that help the customers. IBM has a large consulting practice, which we can leverage.”

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