Hardball battle in the software world

PALO ALTO, CALIF. — Palo Alto, Calif. -- THERE'S AN adage in the computer business that the hostile takeover of a software company is impossible.

What is a software company, after all, but a rented office filled with nerds?


Attack the company and the nerds will flee, taking with them the real corporate assets -- their programming skills.

why is an old-line company such as IBM -- a company that has never mounted a hostile takeover in its 70-year history and certainly is not known for radical thinking -- mounting just such an attack on the Lotus Development Corp., offering $3.3 billion this week for the spreadsheet pioneer?


In fact, though there have been software mergers, this kind of takeover has simply never happened before. IBM is treading new ground and, from a traditional perspective, is taking a terrible risk. At least that's the way it looks.

But because it is staid, old IBM -- and not Microsoft or an aggressive data-base company such as Oracle Systems -- this strange move suggests that there is more here than might be expected.

fTC In fact, it comes down to semantics. There is a potential takeover in progress, that's for sure, but IBM is counting on the technical geniuses at Lotus to view it as friendly. The only hostility IBM seems to want to express is toward Lotus' chief executive officer, Jim P. Manzi, who opposes the deal.

The personnel of software companies can be generally divided into two groups -- techies and suits.

Mr. Manzi, an MBA who came to Lotus originally as a consultant from McKinsey & Co., is a suit among suits, proud in the past about how he didn't understand the inner workings of his company's products. Nor did he have to understand those workings. He had techies for that.

This is typically not the sort of attitude to endear the boss to the programmers, a group that generally sees suits as a necessary evil kept around mainly to count the money.

There is no doubt Lotus is for sale. Mr. Manzi is known to have offered the company last year to AT&T; for $100 per share. So the issue is price. Mr. Manzi, who is also Lotus' largest shareholder, wants more than the $60 per share being offered by IBM.

What IBM wants is not the venerable spreadsheet program for personal computers, Lotus 1-2-3, nor any of Lotus' other personal-computer applications. Those applications have been quietly for sale.


IBM wants a Lotus product called Notes, the leading example of a new software category known as groupware -- software that allows groups of workers to communicate with one another and have access to the same data.

Lotus and IBM are both confident that groupware will be central to corporations in the future as office work increasingly takes place in computers.

Paradoxically, IBM once owned a piece of Notes. Unsure of its success, Mr. Manzi sold the right to a third of all its future revenue to IBM in 1991 for $40 million. A couple of years later, when he realized how strategic Notes was to Lotus' future, he retrieved those rights by paying back the money and promising to produce applications for IBM's OS/2 operating system.

Now IBM wants back what it once had, along with the other two-thirds. The price increase, from $40 million to $3.3 billion, reflects how much the personal-computer software market has changed in four years, and how vital IBM sees Notes to its future success.

AT&T; likes Notes too and may make its own play for the company. The only big player in the software business virtually guaranteed not to be interested in Lotus is Microsoft, which would face antitrust problems from its head-to-head competition with Lotus in the spreadsheet, word processing and data-base categories.

Besides, Microsoft already had its chance to buy Notes. Mr. Manzi offered the whole product to Microsoft in 1989 for $20 million, $5 million more than Microsoft was willing to pay.


IBM is right: it is not mounting a hostile takeover. The nerds will influence how this turns out, and chances are they will come in on the side of Big Blue.

@4 Robert X. Cringely is a columnist for InfoWorld.