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IBM Tiptoes to Telecom With Micromuse

Light Reading
News Analysis
Light Reading
12/22/2005

IBM Corp. (NYSE: IBM)'s $865 million purchase of Micromuse Inc. (Nasdaq: MUSE) signals the IT giant might be getting more serious about its moves into the telecom sector, experts say. (See IBM Buys Micromuse .)

The deal demonstrates a potential new trend toward combining enterprise network and telecom network management tools, say some experts.

"IBM's been trying to push into the telecom space but their overall product portfolio has been relatively weak," since Tivoli lacks the scaleablility to make it carrier class, says Patrick Kelly, partner at OSS Observer . Kelly believes acquiring market leader Micromuse will give IBM the tools it needs to become more competitive with rivals HP Inc. (NYSE: HPQ) and CA Technologies (Nasdaq: CA).

Under the all-cash deal, IBM will integrate Micromuse's Netcool network management software into its Tivoli software portfolio, which helps enterprises manage their computer networks. The deal reflects the increasing convergence of enterprise and telecom sectors as large corporations install applications like VOIP and videoconferencing and even develop their own communications networks. (See Enterprises: More Fiber in the Diet? .)

IBM says the Netcool product fills a gap in its product line that has widened as enterprise networks become more complex and require real-time, service management capabilities. It will also give the company a foothold in the service provider market, where it's been wanting to go.

Micromuse has around 1,800 customers, including heavyweights like BT Group plc (NYSE: BT; London: BTA), Verizon Communications Inc. (NYSE: VZ), and Orange (NYSE: FTE) and boasts an OEM agreement with Cisco Systems Inc. (Nasdaq: CSCO). It reported revenues of $160.8 million for fiscal 2005, an increase of 10 percent from the previous year. (See Micromuse Posts Q4, FY05.)

The deal is one of the biggest in the OSS space this year and a good fit for Micromuse, says Kelly, because it will give the vendor the geographic scope it needs to expand into high-growth markets like China and India. "I would expect to see a market share increase for Netcool-related products," he says.

For IBM to make it in the telecom sector, Kelly notes it will need to continue its shopping spree to acquire service activation and/or network resourcement capabilities. Likely acquisition targets include MetaSolv Software Inc. (Nasdaq: MSLV), Syndesis Ltd. , Cramer Systems Ltd. , and Netcracker Technology Corp. The Micromuse purchase is IBM's eleventh in a string of acquisitions this year that included Collation Inc. , which provides software to track inventory controls and is used in Netcool.

The purchase price of $10 per share was a 39 percent premium on Micromuse's closing value of $7.21 per share on Tuesday, and investors clearly approved -- the stock rose by $2.59, 36 percent, to $9.80 yesterday after the announcement. Micromuse shares were recently trading hands at $9.88. Back in the bubble days, Micromuse once traded for $100 a share.

— Nicole Willing, Reporter, Light Reading

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