IBM's pounds 2bn bid for Lotus starts war with Microsoft

FROM DAVID USBORNE

in New York

IBM, the world's largest computer group, yesterday launched a surprise pounds 2bn ($3.3bn) hostile cash takeover bid for the software company Lotus Development Corporation.

If it goes through, the deal would mark IBM's first unfriendly acquisition and would also represent the biggest software takeover in history. The move is a sharp change of strategy for the company, which has spent years cutting costs and axing jobs.

A successful bid would allow IBM to compete head-on with Microsoft, the software market leader whose $2bn planned deal with Intuit collapsed two weeks ago after anti-competitive objections from the US Justice Department. IBM sees no competition problems with its Lotus offer.

The IT giant hopes that if the bid succeeds it will acquire a "killer application" in the shape of Lotus Notes . This is the first successful "groupware" application, which enables many users to share information and work in collaboration across computer networks - even when they are using different types of computers and operating systems.

Although the product has been on the market for several years, it has lacked the heavyweight marketing resources that IBM could provide.IBM hopes to establish Notes as an industry standard.

In its announcement, IBM said it would offer $60 a share for Lotus, a premium of 85 per cent on the Friday closing price of $32.50. Lotus shares shot up in response to the bid, climbing more than $27 in early trading on the Nasdaq exchange.

The bid apparently followed negotiations between IBM and Lotus on a potential friendly merger. IBM was apparently prompted to go directly to Lotus shareholders after those talks failed to reach any conclusion.

Lotus issued a terse statement calling the bid "particularly surprising in the light of discussions and negotiations on contracts and joint development that have been under discussion between the two companies for several months".

Details of the bid will become known next week when IBM submits its tender to the Securities and Exchange Commission. The company said it intended to finance the offer from its cash reserve of about $10bn.

Louis Gerstner, IBM's chairman and chief, said: "Combining IBM and Lotus represents a truly unique opportunity. Our goal is to accelerate the creation of a truly open, scalable collaborative computing environment so people can work and communicate across enterprises and across corporate and national borders.

"Both Lotus and IBM have been investing significantly in this new model of computing but together our skills match in a way that is breathtaking.

"We think this transaction is truly unique, that it is very powerful to combine these two companies to be able to deliver what customers are looking for around the world. And we hope that eventually Lotus will see it that way as well."

Victor Basta of Broadview Associates, a consultancy that advises Wall Street on hi-tech mergers and acquisitions, said: "You cannot overestimate the importance of something like this to IBM."

He also noted the company's progress under Mr Gerstner since disclosing massive losses two years ago. "In two years they have gone from making the biggest loss in corporate history to attempting their biggest takeover ever".

Although the Justice Department is likely to take a keen interest in the offer, it may find less to object to in it than in the abandoned Microsoft- Intuit deal, since IBM and Lotus are not competitors in any way.

Some analysts speculated about the possibility of other contenders entering the field. They could include two other software heavyweights, Oracle or Novell - both of which had been the subject of rumour in relation to Lotus in recent weeks. Lotus itself surprised Wall Street by announcing a 18 per cent first-quarter fall.

A marriage of IBM and Lotus would further illustrate a dramatic growth in the number of acquisitions and mergers in the IT industry. Total merger activity in 1993 equalled only $5bn. That would be surpassed this year with just this deal and one last month by Computer Associates.