IBM's acquisitions and strategy for 2011 (Q&A)

Few would question the impact that mergers and acquisitions have had on the IT landscape over the past year, and most people believe the acquisition trend will continue to heat up in 2011. Market consolidation is already happening with big companies getting bigger, and a host of start-ups are looking to carve out a niche.

One of the biggest consolidators via acquisition is IBM. Big Blue has acquired no less than 65 companies since 2003 and in an exclusive interview with CNET, IBM Senior VP and Group Executive Steve Mills told me the company will continue to look for acquisitions and plans to spend $20 billion during the next five years, primarily on software companies.

When I spoke with Mills in January, he told me the company had systematized its acquisition process to see immediate gains from its investments. Based on my talk with Mills, not much has changed, though the company has continually improved their strategies and tactics.

Question: Has your acquisition perspective changed now that both software and hardware are in your purview?
Mills: Not at all. With responsibility for hardware and software, there are actually a great deal of synergies. If you look at how software is related to system structure and optimization you see the benefits available when you have both sides of the house working together.

What are IBM's key growth market segments?
Mills: Across the brand structure there are multiple market opportunities. Some areas have faster growth and those tend to be where we to steer both our organic investments and acquisitions.

We don't predict this to be changing into a specific stratification. Business analytics, process analytics, systems management, device management, security--these are all places that we've been successful in targeting and will continue to do so, but there are many places that are less obvious where could make investments.

We traverse our portfolio and the product offerings meet each other at intersections. Customers can see value there and often even ask IBM for more--they want things to be combined and used in context for both today and tomorrow. The intersection is where the customers struggle the most and where we see opportunity to fill the holes.

One important aspect is that the compute architectures we bring to market are all interconnected. We need to keep the dialog going and make sure we add all of the other pieces. It's not as if customers have just one piece of the puzzle. You have to build, manage, and run. If you don't consider all of these, you can't offer the customer what they need.

What does IBM mean by "higher value capabilities" in terms of software?
Mills: There's value up and down the spectrum--the logical totem pole if you will.

The value of each component is highly dependent on the things that it sits on top of. You can't only focus in one area or your competitors can undermine your value from below or above.

You have to navigate around what customers want---often times enterprises look to things that bring value to the line of business, but there has to be value to the guys who are actually running the systems as well. An application may solve be a profound technical challenge that the user has no interest in, or reason to know about. And it doesn't matter to the user but it does to the guys running the systems.

Ultimately, customers will end up with greater or lesser quality of service dependent on how well they have determined the value of their stack and how well the components intersect.

In consideration of IBM's strength in R&D, how are acquisitions determined to be better than something you can build?
Mills: IBM can build anything, but we recognize the value of time. We literally can't build everything. Acquisitions can be a great way to augment what we can't do ourselves and we get technology, talent etc.

We generally simplify our decision process into three options: make, buy or partner. Depending on the integration with other components as well our time to market we assess the right approach for a given piece of software or hardware.

How does the growth of cloud play into your acquisition strategy?
Mills: It all comes back to customer value and many of the cloud ideas are about delivering a capability at a lower cost. In some areas, customers won't go to an external provider, but they are interested in the attributes and techniques.

Companies like ADP, UPS they all offer online services. They just don't call them cloud. If you are an accountant using ADP, they are your cloud provider. UPS does this for logistics, supply chain etc., they do this all for you on their systems. Is it cloud? Sure, depending on your definition. Odds are most of the consumers of these services don't have a preference.

Users want to buy the outcome--and want to buy it at the best price. That aspect of computing has long been with us but the technology has caught up to make these offerings more broadly available.

How are customers reacting to virtualization in regards to sprawl and the dominance of VMware? Also, is KVM the winner for Linux?
Mills: I was trained to sell virtualized systems 37 years ago at IBM, so we are fairly well entrenched. This is not new for IBM, but applying these principles changes the way systems management is performed.

Customers are recognizing that they can deploy VM images on fewer servers, but they still have to manage the images. Sprawl and consistency problems occur, as do management issues that are reflective of the issues they had when they had more boxes.

In relation to VMware, there is a question on how much the market will bear in terms of cost. Interest in KVM is growing for example because of the cost issue and because several Linux providers have thrown their weight behind it.

Microsoft keeps plugging away with the cloud but can't seem to garner mindshare. Is this a marketing issue or a technology shift that they don't have nailed yet?
Mills: There are some aspects that are technology discussions. With any kind of tech you can do a good job or a poor job of implementing it. Because the Microsoft world is a Windows-centric world, while much of the leading-edge cloud stuff has been around open systems and standards it doesn't really fit with Microsoft model.

They have to create something that is broadly appealing to the users of Microsoft environments. The company has become its own self-contained world and the market has passed them by in many ways, with strong interest in open systems and standards.

The other important aspect is the fact that the audience for IT services as a whole is not as captive as it used to be. Microsoft should be able to exploit their tools and user base, but its a difficult task to convince people to avoid open systems.

Last year you told me that you didn't think we'll ever get to "the end" where we'll solve every problem. That seems more true than ever.
Mills: Computers are a tool--the more things you do, the more things become obvious what you could do.

The average person today can use a computer to enhance different aspects of their life--literacy, awareness, evolution of how humans interact. Just as we can build better businesses through intelligence and analytics.

Technology helps our never-ending search to make things better and better--think of the advances in health care, the environment, and clean tech, but it doesn't do it on its own. That's what we're here for.