IBM offers $3.3 billion for Lotus

In its most aggressive attempt yet to recover from a colossal business blunder a decade and a half ago, IBM launched a $3.3 billion hostile takeover bid yesterday for Lotus Development Corp., the third-largest maker of software for personal computers.

There is no guarantee that the deal will go through. Cambridge, Mass.-based Lotus, where creativity and T-shirts flourish, recently rejected friendly approaches from starched, regimented IBM, the companies disclosed yesterday.


Some industry experts believe that Lotus will seek a "white knight" buyer, such as Oracle Corp., to save it from IBM's clutches but still deliver the rich shareholder payoff that IBM has offered.

An IBM-Lotus marriage would be the biggest software buyout ever and would deeply alter the business of making and selling encoded instructions for personal computers, analysts said.


Most significantly, it would establish a formidable rival to Microsoft Corp., which IBM inadvertently helped transform into the world's most powerful and richest software company. "You will now have somebody that can stand eyeball-to-eyeball with Microsoft," said Anthony R. Martin, executive director of the Committee to Fight Microsoft, a nonprofit group that believes Microsoft's dominance is unhealthy for the industry.

"We think IBM's coming back to life. IBM now has an incentive to get more deeply involved in the personal computer market," Mr. Martin said.

Earnings at Lotus have slumped recently. But people lucky or smart enough to own its stock made huge profits yesterday. IBM is offering $60 in cash per share, prompting Lotus shares to jump by $28.94, to $61.44, yesterday. Some analysts expect IBM or another bidder to top $60, which explains why the shares closed even higher. IBM's shares lost $2.625, to $91.25, as investors feared that the takeover price is too high.

The generous offer shows how badly IBM wants Lotus, analysts said.

Each seems to have something the other needs. Lotus is strong on innovation and technical expertise but weaker on marketing and sales, analysts said. IBM sells $10 billion in software annually, but little of it goes into PCs, widely acknowledged as the industry's future.

Lotus is the biggest maker of "applications" programs, such as spreadsheets, for IBM's OS/2 operating system, a minor rival to Microsoft's Windows operating system. Lotus Notes, a program that lets networked PCs share information such as scheduling, databases and e-mail, is highly acclaimed and growing in sales.

The merger "is going to alter the PC software landscape," said Chris Galvin, computer analyst with Hambrecht & Quist, a San Francisco investment house specializing in technology. "IBM hasn't been a player there. It's going to be a player now."

IBM began legal action yesterday to thwart a Lotus "poison pill" defense that would flood the market with Lotus shares.


The deal's scale suggests that antitrust regulators might try to block it. Seattle-based Microsoft last month dropped its $2.2 billion attempt to buy Intuit Inc., maker of personal finance programs, after the Justice Department objected.

But many industry observers believe that regulators will approve an IBM/Lotus merger. With an Intuit acquisition, Microsoft would have made its muscular applications-software business even more dominant. By contrast, IBM doesn't have a desktop applications business to speak of; Lotus doesn't make operating software.

Operating software such as OS/2 and Microsoft Windows runs "underneath" applications, such as word-processing programs, in telling a personal computer what to do.

Some people yesterday suggested that federal regulators would even welcome the merger.

"IBM purchasing Lotus will finally accomplish what the Justice Department has lacked: the wherewithal to achieve a level playing field in the software industry," Scott C. McCready, an analyst at International Data Corp., wrote in a report to clients yesterday.

The logic behind an IBM/Lotus combination is this: IBM's name and worldwide marketing muscle could help sales of Lotus Notes and Lotus 1-2-3, the company's languishing spreadsheet program. Lotus' $970 million in annual revenue would instantly make IBM an important purveyor of applications programs for PCs.


And putting OS/2 plus a slew of companion applications under one corporate roof could give IBM the clout it needs to boost sales of both. Despite years of effort by IBM, most PC manufacturers automatically package Microsoft Windows, not OS/2, with their products.

OS/2 accounts for about 10 percent of the operating-system market, analysts said. A brighter future for OS/2 could also inspire more outside software companies to create applications for it.

"IBM has a big need to attract developers [of applications] to OS/2," said Angela Hey, technology and research manager with INPUT, a market research firm in Mountain View, Calif. "This is about being the leader. It's not hard to attract developers if you're the leader."

But some people believe that Lotus' talent -- the most important asset in any software company -- might refuse to work for staid IBM, even though Lotus' headquarters would stay in Cambridge.

"The people will walk," Ms. Hey said.

Even if a Lotus purchase is judged a success, few analysts believe it will let IBM regain the momentum it lost in 1981, when IBM unveiled its first personal computer, equipped with an operating system made by a small, unknown company called Microsoft.


Other manufacturers soon copied IBM's machine. And Microsoft, allowed to keep ownership of the operating system, became the standard, too. It has since reaped billions. After giving away its first PC software business, IBM has been unable to build another of any significance.

Now, Microsoft is too far ahead, several analysts said. Nothing on the horizon will erode Windows and Windows-based applications as industry leaders, they said.

"With Microsoft," Mr. Galvin said, "it's the strong getting stronger."



Headquarters: Armonk, N.Y.


Employees: 220,000

Businesses: Computers and related equipment

Chief executive: Louis V. Gerstner Jr.

1994 revenues: $64.1 billion


Headquarters: Cambridge, Mass.


Employees: 5,500

Businesses: Computer software

Chief executive: Jim Manzi

1994 revenues: $971 million