International Business Machines Corp.(IBM) has agreed to acquire the Toronto-based risk analytics software firm Algorithmics, for an estimated $387 million in cash. The deal is expected to be completed by October 2011. Algorithmics is a member of Fitch Group, the majority of which is owned by Paris-based holding company Fimalac SA.
Apart from providing risk analytics software, Algorithmics also provides advisory service that is used by financial organizations globally such as banks, insurance companies and investment firms to help evaluate risk, meet regulatory requirements and make business decisions. The company has more than 350 clients, including 25 of the top 30 banks that use Algorithmics software. Some of the companies that use Algorithmics software are The Allianz Group, BlueCrest, HSBC Holdings Plc. (HBC), Nomura Holdings Inc. (NMR), Scotia Capital and Societe Generale.
Through this acquisition, IBM has strengthened its position in the financial risk-assessment space. The IBM and Algorithmics analytics combination would help companies quantify and evaluate operational risk that is linked with lending processes, as well as market and credit risk exposures.
Analytics is among the four growth initiatives for IBM, and the company has been on an acquisition spree over the last few years to expand its analytics portfolio. According to Bloomberg, IBM has spent approximately $14.0 billion in acquiring analytics companies and Algorithmics is the company’s 26th analytics acquisition over the last five years. IBM estimates that by 2015, revenue from business analytics and optimization initiatives would reach $16 billion.
Very recently, IBM had acquired i2, a U.K.-based analytical software developer that prevents crime and fraud in sectors including banking, defense, health-care and insurance. The company boasts a clientele of more than 4,500 spanning over 150 countries.
Our Take
IBM spent $6 billion in acquiring 17 companies in 2010. However, 2011 has been relatively quiet for IBM so far, with the only notable acquisition being that of real-estate software company, Tririga.
IBM expects to invest $20 billion in acquisitions over the next 5 years. We believe the acquisitions will boost profitability going forward. We also believe acquisitions will provide a competitive edge to IBM over Oracle Corp. (ORCL) in the highly competitive business analytics market.
We maintain a Neutral rating over the long term (6-12 months). Currently, IBM has a Zacks #3 Rank, which implies a Hold rating in the near term.
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