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June 7, 1990

OFFENSIVE AS WELL AS DEFENSIVE: IBM’S PREDATORY $1,000M INVESTMENT IN SOFTWARE FIRMS

By CBR Staff Writer

IBM’s investment in third party software firms has risen to $500m, according to Electronic News, and may well reach the $1,000m mark. As forecast last October by Dale Kutnick of the Meta Group (CI No 1,283), IBM is turning into a software supermarket with minority interests in or joint ventures with 40 software companies. Like Kutnick, Electronic News believes it’s all part of a strategy to lock out competitors and meet revenue targets at a time of declining hardware prices. Yet, IBM’s internal software expertise is limited, and it has been unable to grow software and services from 30% to its stated goal of 50%. Further, IBM has acknowledged that 1989 actually witnessed a slowdown in the growth of its software segment, and admits that it can’t develop all the software tools it actually needs. However, IBM’s growing interests in software companies have been carefully constructed to ensure that the resources are made unavailable to competitors, and at the same time, that IBM is protected from potential liabilities. Electronic News claims that IBM started its potential $1,000m buying spree two years ago with a number of specific goals. Targeted firms’ applications have to run on IBM systems; competitors are to be denied access to the software, or development work for competitors is to be slowed down, and IBM reserves the right to veto acquisition of the software house; IBM’s liabilities are to be limited should products fail, and if they are successful, then IBM has the right to buy additional equity. A prime example of this canny policy is IBM’s recent $11.2m investment in Valid Logic Systems for a 5% to 8.3% shareholding depending on the share price. IBM says that this investment will hasten delivery of electronic design automation for the RS/6000, which seems to be a tacit admission that it is incapable of delivering the goods within an acceptable time-frame. Secondly, IBM has said it will invest as much as $90m in the company and Valid has the right to draw on that reserve – but it’s heavily dependent on the success of Valid’s electronic design applications for IBM workstations. Consequently, there is very strong incentive for Valid to concentrate on IBM hardware-based products, and IBM’s liabilities are safely limited.

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