IBM rides surf of software sector acquisitions

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The Independent Online
There was surprise verging on shock when IBM revealed on Monday it was going after Lotus software. In its 71-year history, Big Blue has never launched a hostile bid and, by necessity born of fearful losses two years ago, its focus recently has been on fat-loss, not acquisition. So what gives?

The answer lies with Louis Gerstner, IBM chairman since April 1993, who, having successfully turned around the company's financial position, concluded that it was time to move forward into what he calls phase three of the computer revolution. Phase one was about big mainframe computers; phase two was about PCs. Phase three is about software and especially software that will allow all the world's PCs and mainframes to talk with one another.

Lotus looked the perfect vehicle for Mr Gerstner's ambitions. Recent results have been poor and the company looked ready for takeover. As the number three maker of software, it offered a huge customer base for IBM, which is struggling to challenge Microsoft's Windows operating system with its own, younger, OS/2 Warp. But most enticing for Gerstner was its Notes "groupware" system, which lets different PC operators work on a single document together.

IBM's embrace of Lotus may not be as easy as 1-2-3, the name of the ubiquitous Lotus spreadsheet programme. Lotus may try to resist with a poison pill defence, which IBM is already challenging in court. There remains a distant possibility that another suitor may emerge, with AT&T being mentioned the most. And even if the deal happens there are big questions about how well the two cultures are going to mix. Mr Gerstner has been trying to take some of the stuffiness out of Big Blue. Employees do not now have to wear suits. Even so the prevailing attitude is still a long way from that of Lotus's Jim Manzi, who at a recent company party appeared before his employees in drag. Odd chaps, these software wizzes.

Making the marriage work will be a big challenge for Mr Gerstner. But potential benefits for both sides are palpable. Moreover, IBM is only riding the surf of a sudden acceleration of mergers and acquisitions in the software sector, which, according to Broadview Associates, climbed in value from $2.6bn in 1992 to $9bn last year. Lotus is exactly the kind of mid-size company with wide market coverage but stretched resources that is vulnerable to takeover. Now analysts - and investors - are wondering who will be next. Is someone ready to eat Apple, for instance?

The Lottery is what the Government wanted

Everybody knew the National Lottery was going to be a licence to print money. The public got its first chance yesterday to see just how big a licence that is. In its first year the company will achieve sales of pounds 4bn- pounds 5bn, equivalent to FT-SE 100 stocks such as Boots, Bass, and Argyll. Though Camelot, which runs the lottery, expects to earn only 1 per cent a year on these sales over its seven-year licence period, there is no doubt that its owners have hit the jackpot. And so have its directors. Under a remuneration deal that contains no fewer than three different types of bonuses, directors can treble their money if they fulfil certain performance criteria. The key measures here are the cumulative funds generated for the National Lottery Distribution Fund and cumulative profits generated between 1994 and 1997. It goes without saying that the company is now quite likely to meet these targets. The result would be that Tim Holley would earn pounds 696,000 in 1997, around three times his basic pounds 240,000 salary. Not bad for a company that hardly has to fight to make its way in the world.

More than pounds 350,000 was paid out to the board this year just for getting the Lottery off the ground, a payment that is justified by pointing out that if the weekly draw had not started in November, Camelot would have incurred pounds 1m a day in penalties and could have had its licence revoked by Oflot, the regulator.

All this may look like excess, but the fact is that the country got what it wanted, or at least what the Government wanted. It has a privately run lottery, with handsomely paid executives who are motivated to increase profits and therby the money that is distributed to charity. Many people may not like it, but that is what Parliament sanctioned.

Floating this company on the stock market, however, as its owners no doubt hope eventually to do, is going to be far from easy. A bit like the privatised utilities, this is a company which is always going to have a serious public relations problem. In the public eye it is always likely to be seen as a fat cat, profiteering organisation, whatever it generates for good causes. Big bonuses for directors only strengthen the perception. Oflot will work hard to ensure that profits do not get out of hand.

These privatisations are a bad bet

Even John Collier, chairman of Nuclear Electric, now admits that the Government's timetable for nuclear privatisation - by the summer of 1996 - is only just about feasible. If he thinks that - and Mr Collier has been the toughest of lobbyists for a sell-off over the past two years - then we can be sure there is a real problem.

It is much the same story at British Rail, though for very different reasons. At BR, the timetable slips month by month. We were promised the first 20 sales of railway subsidiaries by March, then April. This week, the first six have been signed so there is progress of sorts. However, nobody believes there is a hope of signing up more than half the train operating franchises by next April, another government target. As for the idea of launching Railtrack on to the stock market in the first quarter of 1996, the Government would be on a better bet buying tickets in the National Lottery.

The worst aspect of these two privatisations is that they interreact. The Government needs the money for tax cuts and the privatisation enthusiasts want to offload as much as they can before Labour gets in. So the more difficulties crop up with one project, the more the pressure will be piled on to achieve the other, and vice versa.

Speed will do nothing for the Government's chances of convincing investors, already suspicious of the figures, that they should buy nuclear shares at anything but an enormous discount. Even forgetting the nuclear element, who would want to invest in a company that by the time of the sale will not have begun to bed down the extensive management reorganisation implied by the merger with Scottish Nuclear?

Merchant bankers and government officials might just pull both sales off in time for the election by working 16 hour days, seven days a week. But if they do, the next 10 years will be spent sorting out the mess they left behind.

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