Thursday, March 06, 2008

IBM/Telelogic Acquisition Update: Part 2

What Happened?

Ending the in-depth investigation that began on October 3, 2007, the European Union’s Competition Commission announced regulatory approval for the proposed IBM/Telelogic deal on March 5. According to the EU’s Competition Commissioner, Neelie Kroes, "IBM's and Telelogic's modeling and requirements management products are not close substitutes, as they generally address different types of customers and different needs."

Although the deal has finally received regulatory approval, the formal merger will not conclude until at least well into the second quarter of this year. According to IBM, “Provided that Watchtower announces that the conditions of the Offer have been satisfied or waived on March 27, 2008, settlement is expected to commence approximately one week thereafter.” As a result, not only will this acquisition’s ultimate impact on the market remain unknown for some time, but IBM will delay any potential synergies or other resulting competitive advantages planned for 2007.

VDC’s View

Based on VDC’s research, the proposed merger will turn IBM/Rational’s and Telelogic/I-Logix’s market leadership in the space into a singular presence with a share of over 80% of the worldwide revenues from embedded software modeling tools. It should also be noted that these companies’ combined share of the market has remained relatively constant over the past few years, except that it was previously distributed among three vendors prior to Telelogic’s acquisition of I-Logix in March 2006.

Beyond the embedded software modeling tools space, VDC also expects that a similar market share advantages exist within the requirements management tool market, especially in regards to key industries such as military/aerospace and automotive. Although VDC believes that the success of the Rhapsody product line has fueled much of Telelogic’s recent growth, Telelogic’s Application Lifecycle Management (ALM) solutions, including the DOORS requirements management tool, remain the leading source of the company’s business and were most likely one of this acquisition’s primary catalysts.

While this acquisition may leave the market without the parity that was present a few years ago, the uncertainty surrounding the future direction and embedded focus of the combined company and its tools may cause current and potential clients as well as competitors to revaluate product decisions and strategies, thus generating ample new opportunities within the market. In addition, the growing functionality and acceptance of low cost (e.g. Sparx Systems) modeling tools should continue to present adequate obstacles to any overly monopolistic behavior. As a result, this acquisition’s ultimate impact on the market will not be known for some time and raises some key questions:

  • Will the sum of the parts prove to be greater than the whole?
  • Will there be another “Rational Effect”?
  • What long-term impact will this have on IBM's and Telelogic's customers and strategic partners?
  • What other technologies might IBM look to acquire next to complement their growing embedded solution tool chain?
  • Will any of IBM’s other competitors in the ALM or PLM tools market look to acquire comparable software modeling technologies?