IBM aims to get Rational

IBM will pay $2.1 billion in cash to acquire modeling tools company Rational Software, in a bid to win over more application developers.

Rational's business operations will be combined with IBM's software group, and its products will retain the Rational brand, the companies said Friday. Rational CEO Mike Devlin will become general manager of the new Rational division within the software group, reporting to IBM Senior Vice President Steve Mills.

The tech giant is paying $10.50 per share for Rational, a premium of about 28 percent from the stock's Thursday close of $8.17. On Friday, shares of Cupertino, Calif.-based Rational were up $2.12, or 26 percent, to $10.29.

Rational is the leading seller of tools to create models of applications and databases before programmers actually start coding. For application projects that are large or complex, application architects and developers rely on visual models to structure code development and manage projects. Because Rational's tools are aimed at high-end projects, the company is well entrenched in large corporations.

IBM said that the Rational acquisition adds to its e-business On Demand initiative, which it recently launched. The On Demand technologies are designed to give businesses more flexibility and speed in reacting to changes in business conditions.

"The capability Rational brings is an ability to build the applications that support the On Demand operating environment," said Paraic Sweeney, IBM's vice president of marketing for WebSphere business integration. "Rational brings a structured and predictable way to develop new application logic."

Rational's "life cycle" tools for modeling and project management will complement IBM's focus on development tools focused on specific programming languages such as Java, C and Cobol, said Mills. IBM is also looking to take advantage of Rational's presence with embedded device manufacturers, officials said.

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"We see this acquisition as allowing us to focus on end-to-end application development and process integration," Mills said. "Part of what we have been doing with Rational, and plan to do more of in the future, is striving for more optimization between IBM middleware and Rational's tools."

Analysts said the move underscores IBM's ambitions to gain the loyalty of developers and woo them away from Microsoft's .Net initiative. Bringing Rational into the IBM fold will also give more momentum to IBM's open-source Eclipse project, which aims to foster interoperability among different Java-oriented tools, analysts said.

"This is a stunning deal and a big win for IBM," said James Governor, an analyst at RedMonk. "This massively solidifies IBM's position and puts significant pressure on Microsoft."

IBM and Rational have been strategic partners since 1999 and have been close collaborators on IBM's Eclipse development tools project. Rational also has a long-standing relationship with Microsoft, which is crucial to the latter's presence in large corporate accounts. Microsoft sells its own modeling tools, but relies on Rational for the more complex implementations, particularly for mixed installations where both Microsoft .Net and Java programming occurs.

Because customers demand tools to bridge competing software environments, Microsoft will need to retain its partnership with Rational, even though the company is now owned by IBM, analysts said.

"This is the 'co-opetition' reality that software companies play with. IBM and Microsoft will have to figure out the boundaries of where the control is," said Ted Schadler, an analyst at Forrester Research. "The alternative for Microsoft is brutal. They would have to make their own tools for the high end, which is really hard to do, even for a company as sophisticated as Microsoft."

With the acquisition, Rational will become the fifth brand in IBM's software group, along with Lotus, DB2, Tivoli and WebSphere. Rational and IBM executives said that they will combine the development tools with IBM's software so that customers can build and manage applications simultaneously.

"This is a chance that I think is unparalleled to provide software development that is integrated with a software execution platform. That has never been done before," said Eric Shurr, Rational's chief marketing officer.

Rational reported a pro forma profit of $7.1 million in the third quarter, which ended Sept. 30, on sales of $154.5 million. That represented a drop from the year-earlier quarter, when the company earned $9.5 million on sales of $163.7 million.

The companies expect to close the deal by the first quarter.

CNET News.com's Margaret Kane contributed to this report.