International Business Machines (IBM 0.31%) has a knack for using acquisitions to bolster its growth businesses. The tech giant occasionally goes big, as it did with the $34 billion acquisition of Red Hat in 2019, but most of its acquisitions are smaller.
Most recently, IBM shelled out $4.6 billion for financial and operational IT management and optimization software provider Apptio. Apptio’s products can help IBM’s clients keep cloud spending under control as they modernize their IT infrastructures.
IBM announced on Monday that it’s following up the Apptio acquisition with another significant purchase. The company has agreed to acquire StreamSets and webMethods, two products that comprise what current owner Software AG calls a “super integration platform-as-a-service.” The deal will cost IBM about $2.3 billion and be funded from the company’s available cash on hand.
Solving a thorny problem
Enterprises use a wide variety of software and tools. Often, these tools don’t work nicely together. One solution is to dedicate software engineering resources to building bespoke integrations between tools. This works until it doesn’t. These integrations tend to be fragile, requiring additional resources to fix when something goes wrong.
The picture is complicated further when an enterprise needs to connect both modern cloud applications and legacy software running on its own servers. A cloud-based customer relationship management tool may need access to data squirreled away in an application that’s been running on-premises for decades, for example. Making that connection in a reliable, low-maintenance way is tricky.
An iPaaS, or integration platform as a service, aims to solve this problem. Using an iPaaS, connecting two applications is no longer a software engineering project. If the marketing team wants to automate a workflow, pulling data from multiple places and connecting multiple applications, the iPaaS makes it happen with minimal fuss.
While a standard iPaaS is focused on connecting modern cloud-based applications, the iPaaS platform IBM is acquiring takes it a step further by supporting integrations with legacy software. The platform also helps solve the issue of connecting applications in cases where data residency rules add another layer of complexity.
IBM is all in on hybrid cloud computing. The company helps its clients modernize their IT infrastructures, which usually involves running workloads on multiple public clouds as well as on private clouds. An iPaaS product that seamlessly connects all those workloads is a valuable addition to IBM’s suite of hybrid cloud software products.
This acquisition also boosts IBM’s artificial intelligence (AI) business. StreamSets is all about data ingestion, and IBM will use it to add data ingestion capabilities to its watsonx AI platform.
Focusing on what works
While IBM is seeing some clients pull back on spending in some areas, digital transformation and application modernization are in high demand. IBM’s clients are looking for projects that can deliver cost savings, productivity gains, and efficiency improvements.
The acquisition of StreamSets and webMethods will strengthen IBM’s hybrid cloud and AI platforms. Notably, the platform IBM is acquiring is growing, already profitable, and has significant recurring revenue. Around 50% of IBM’s total revenue was recurring in nature during the third quarter. By 2027, the market for integration software is expected to top $18 billion.
IBM has started to find its groove after a decade-long transformation effort. Revenue should grow by 3% to 5% this year despite an uncertain economy, and free cash flow is set to expand by more than 10% to $10.5 billion. As IBM continues to push its hybrid cloud and AI platforms, the $2.3 billion acquisition of StreamSets and webMethods will make them more compelling for enterprise customers.
Timothy Green has positions in International Business Machines. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.