IBM Rational to Acquire Telelogic

What Happened?

IBM has entered into a definitive agreement to acquire Telelogic at an offer price of 21 Swedish Kronor per share or approximately US $745 million, subject to regulatory reviews and other customary closing conditions. Telelogic AB is a public company headquartered in Malmo, Sweden. Upon completion of the acquisition (expected to close Q3 2007), Telelogic will be a business line within the IBM Rational Software unit.

Acquisition Analysis

Last year, Telelogic acquired embedded software modeling tool rival I-Logix and has since worked to integrate the company's Rhapsody product into Telelogic's existing suite of Application Lifecycle Management (ALM) products, including the popular DOORS requirements management solution. Post acquisition, the competitive landscape featured a growing Telelogic looking to challenge IBM in this segment as both a leading UML tool provider for embedded software development and in offering an integrated suite of ALM tools that could be competitive with IBM’s larger product offering.

Within the software modeling tools market, IBM’s acquisition of Telelogic will surely change the competitive landscape. The combined company will become the clear market leader in UML tools within the embedded space and VDC believes that there will be few challengers able to match IBM Rational/Telelogic in terms of revenue, breadth of product offering, global reach, and consulting services.

Perhaps more importantly, in addition to securing leadership in the embedded software modeling tools market, the acquisition also strengthens the positioning of the company's larger ALM offering across both the embedded and enterprise markets. IBM Rational/Telelogic will now have a broad set of complementary market solutions to offer to their diverse customer base and will likely look to leverage solutions and services from both companies across specific target markets that play to each solution's strength. The acquisition will provide greater opportunity to deliver integrated products to shared customers, especially within the military/aerospace, automotive/transportation, and telecom/datacom industries.

VDC’s View

While VDC sees remaining competition here, the acquisition will certainly result in a dominating position for IBM in the embedded software modeling tools market and in ALM. These reasons alone make the deal interesting, but VDC wonders what IBM's larger view of this move means to their business, and how this acquisition fits within their larger product and services strategy.

Prior to this acquisition (and based to some degree on vendors looking to capitalize on IBM’s shift away from the Rose product line toward System Designer), there was a prevalent market perception that IBM’s focus on and dominance within the embedded market had deteriorated. However, the acquisition signals a change in IBM’s tactics within the embedded device market. It will be interesting to see how IBM continues to support various Telelogic and IBM Rational products in cases where the technology is overlapping. In their announcement, the company was quick to point out that they do not intend to repeat some of the same mistakes that they made with the Rational product line, and this seems to show a renewed commitment to directly addressing the requirements of the embedded market.

The move also hints that the company may see larger opportunities for future growth. Driven by the development of complex systems, success or failure is increasingly dependent on software, as well as a more integrated approach to overall system specification, design, and test across various engineering disciplines. For this reason the acquisition raises a number of questions including:

• What impact will this have on IBM's strategy and vendor partner relationships across other segments of the embedded systems market? In the enterprise systems space? How will IBM look to bring the technologies within these two markets even closer together?

• With a leadership position in embedded ALM, what might be IBM’s next move on the embedded systems front? Is the company considering additional acquisitions of complementary technologies within the dynamic system design tools, EDA/ESL tools, and/or PLM tools markets?

VDC's guess is as good as anyone’s, but IBM’s pervasiveness across so many other aspects of system engineering (development tools, chips, professional services, etc.) and the fact that ALM impacts so many other areas of embedded systems engineering should make vendors across all spaces take note.