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Big Blue's math shows Algorithmics worth $387m

Risky business

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IBM has embiggened its Software Group for the second time this week with the $387m acquisition of Algorithmics. The company is a specialist in risk analytics software, which it will cram into its ever-bulging quiver full of business analytics arrows.

The deal for Algorithmics, which is based on Toronto, follows a day after Big Blue snapped up British crime and fraud analytics specialist i2 for a reported $500m, marking the 26th acquisition that the company has made in the past five years. All told, those acquisitions cost IBM just under $15bn, with the $5bn acquisition of Cognos in November 2007, the $1.2bn deal for SPSS in July 2010, and the $1.7bn purchase of data warehousing appliance maker Netezza in September 2010 being some of the biggies on the analytics front.

There have been many other smaller deals that are more typical of IBM's acquisition strategy, which is to buy software companies with hundreds to thousands of customers in a niche part of the market that it can expand through its vast global sales force and channel.

The company boasts that it has more than 8,000 consultants with expertise in business analytics and optimizations as well as 200 mathematicians who work at IBM Research on algorithms and other patentable intellectual property and who have yielded 500 patents.

Algorithmics is part of French holding company Fimalac, which is based in Paris and which also owns the Fitch Ratings agency that issues credit ratings for companies and governments. Algorithmics was part of Fitch Group, which did the ratings as well as selling the software to do risk management. Fimalac also owns real estate in London and has a number of other ventures as you would expect from a holding company.

Fitch Group bought Algorithmics in December 2004 for $175m, and did so because Algorithmics, founded in 1989, was created to measure and manage the financial risks of investments in the wake of the 1987 stock market crash. At the time that Fitch Group bought Algorithmics, it had 150 customers using its Algo Suite of software.

As of today, Algorithmics has 800 employees in 23 offices in the financial centers of the world, and the Algo Suite now has 24 modules that assesses the value of collateral, determines credit risk and limits, does liquidity analysis, and various market analytics relating to risk and credit. The company has more than 350 clients worldwide, including 25 of the biggest 30 banks in the world and two-thirds of the biggest insurance companies, according to a statement released by IBM.

In its statement on the deal, Fimalac said that Algorithmics generated $163.7m in revenues in its fiscal year ending in September 2010, with a $10.3m operating loss. The company has not finished its 2011 fiscal year and neither IBM nor Fimilac said whether Algorithmics was growing or profitable in fiscal 2011. But clearly at the $387m in cash that Big Blue is ponying up, the company believes that it can grow the business and turn a profit. Presumably Fitch Ratings will be a big Algorithmics customer going forward, and maybe with IBM owning it, Standard & Poors and Moody's might be inclined to take a look at it, too.

The heart of IBM's Software Group is in Toronto, where its database, middleware, and application development tools mostly come from these days. (Operating system software still tends to come from wherever the server platform is developed – AIX in Austin, Texas; IBM i (formerly OS/400) in Rochester, Minnesota; and z/OS, z/VM, and z/VSE in Poughkeepsie, New York.) So Algorithmics will slide right in.

In a statement, IBM said that it planned to take some of the risk management software it got through its acquisition of OpenPages in September 2010 plus a number of predicative analytics programs (including those from SPSS) to do risk analysis on a broader and deeper level.

IBM expects the Algorithmics deal to close in October. ®

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