IBM's $2.1bn Rational deal to upset market

In its largest software takeover since acquiring Lotus, IBM is to buy software development tools company Rational Software for approximately $2.1bn (£1.33bn).

Rational provides software and services to 98 of the Fortune 100 companies, including IBM itself, operating in a market that analyst group IDC estimates will grow from $9bn (£5.7bn) now to $15bn (£9.5bn) by 2006.

Ian Charlesworth, senior research analyst at Butler Group, said: "The announcement is clearly huge news, and is likely to 'unsettle' the application development market, not least Microsoft.

"It demonstrates just how critically application design and development is to IBM as a whole."

Rational had positioned itself cleverly and until today had been seen as independent, Charlesworth said.

"Like it or not, it has plunged into the IBM world, and this could affect the way existing users feel. Managing the expectations and concerns of users may prove to be the greatest challenge," he added.

Michael Devlin, Rational's chief executive, said: "The combination of IBM and Rational is a logical extension to what has been a very beneficial 20-year relationship."

IBM vice president Steve Mills said: "This is an important part of IBM's On Demand strategy." He added that Rational would help provide infrastructure software and tools to give customers a complete software development environment.

In recent months integrated development environment companies like Borland and modelling tools specialists such as Rational have been moving into each other's territories as they expand across the development lifecycle and adopt open standards.

One driver has been the Object Management Group's model-driven architecture standard that attempts to convert standard system models into application code.

IBM's main acquisitions since January 2000

• December 2002: Acquires Rational Software for $2.1bn
• November 2002: Buys Canadian e-records company Tarian Software for an undisclosed sum
• September 2002: Buys identity management company Access360
• July 2002: Buys consultancy PricewaterhouseCoopers for $3.5bn, its largest recent deal
• October 2001: Takes over CrossWorlds Software for $129m
• April 2001: Buys the assets of Informix Software, Informix's database business, for $1bn
• April 2001: Buys Mainspring, a digital business strategy consulting firm, for $80m
• April 2000: Buys Sequent Financial Services leasing portfolio, formerly Sequent Computer Systems