IBM's Mills Opens Up on Collaboration

Big Blue software bigwig Steve Mills discusses future profits, IBM's acquisition strategy, and the importance of an open format

Steve Mills joined IBM in 1974 as a sales trainee in New York City, rose into management by the mid-1980s, and became the executive in charge of IBM's software business in 2000. That business generated more than $18 billion in 2006 sales—about one-fifth of IBM's total—and contributed 40% of the company's profits. By 2010, IBM (IBM) expects half of its profit to come from software.

Mills' software group has been involved in nearly 50 buyouts since 2000. So far this year, the 56-year-old Mills has made five software acquisitions. Big Blue tends to wring growth from the companies it buys by selling customers of its popular WebSphere middleware (software for connecting applications), its DB2 database, and other widely used products on the benefits of new technologies.

But competitors are angling for pieces of IBM's market share. They include hyper-acquisitive Oracle (ORCL); a Hewlett-Packard (HPQ) that's putting more focus on software; and Microsoft (MSFT), which continues to push for a bigger share of corporate computing budgets.

At a Sept. 27 conference on partnerships with venture capital-backed companies at IBM's Almaden Research Center in Silicon Valley, Mills, a senior vice-president and group executive at IBM, spoke with BusinessWeek.com technology writer Aaron Ricadela about IBM's software growth plans, the acquisition landscape, and competition with Microsoft and Oracle. An edited excerpt follows.

A year ago you said you hope to increase the size of IBM's software business by 6% to 9% a year, with new acquisitions contributing 2% to 3% of that. Is that still your goal?

Six [percent] to 9% growth had been the bandwidth we shared with the investment community in the spring. Looking out to 2010, we expect the model to in fact lift from 6% to 9%, to 7% to 10% on the revenue side. We're tracking within that bandwidth—we did 7% last year. The percentage of our software that comes from some of the faster growing parts of the portfolio continues to get larger, and that provides some lift to the overall growth rate. Inside of those numbers in any given time period, two to three points of growth will be attributed to acquisitions.

What areas of the market are you focusing on to help achieve those goals?

We always start with a market view. If we don't drive the organic growth of our business, we're not going to create the company we want purely through acquisitions. With a $20 billion software business, you're obviously not going to be able to buy enough things in any given time to propel growth purely by acquisition. Furthermore, from a customer's perspective, what they're looking for is things that fit together. We've always been very focused on acquiring things that fit well with the technologies we have. The revenues of the companies [we buy] actually increase—often double—compared with what they had been on a standalone basis. We drive for reasonably rapid payback. We want to mitigate purchase-accounting effects, and demonstrate how these things are accretive to the shareholder within a relatively short period of time. Our track record's been quite good. We've been driving a roughly two-year accretive full GAAP accounting; our competitors tend to not talk about it in GAAP terms.

Then the question is always, "What companies are you going to buy, Steve?" Everybody asks me that question and naturally I can't give the answer. But the past is prologue to the future insofar as the kinds of acquisitions we've done have for the most part been midsize to small. We certainly acquired our share of venture-funded companies that haven't yet gone public.