IBM Corp will buy Kenexa Corp for about $1.3 billion to enter the human resources software market in a move that would likely increase competition with Oracle Corp and SAP AG who recently bought into the sector.
The deal underpins the importance that slow-growing technology giants place on faster-growing, web-based software makers, whose products are less vulnerable to the economic downturn as there are no upfront costs for program licenses, dedicated hardware or installation.
Germany's SAP bought Kenexa's competitor SuccessFactors for $3.4 billion in cash last December, while Oracle bought rival Taleo Corp for about $1.9 billion in February.
The two companies made other cloud purchases, including RightNow Technologies and Ariba Inc.
"IBM is widely regarded as a social enterprise thought leader, though monetization has been largely concentrated around services," Credit Agricole Securities analyst Ed Maguire said in a note.
"With 80 percent of revenue from subscriptions and a substantial consulting component, Kenexa advances IBM's strategy toward higher-value software as a service and domain expertise."
Kenexa shares jumped nearly 42 percent, equaling the premium offered, to a life high of $45.92 on the New York Stock Exchange on Monday. Shares of peer Cornerstone OnDemand Inc were up 7 percent at $26.82 in afternoon trading.
The acquisition suggests that IBM is ready to find a foothold in the fiercely competitive market for delivering business applications via the web.
It brings the company face-to face against close partner SAP and rivals Oracle and Salesforce.com Inc, the largest maker of web-based software in a crowded market.
"This is a big step," said Nucleus Research analyst Rebecca Wettemann. The move makes it clear that IBM is serious about taking on Oracle, SAP and Salesforce.com in the business applications market, the analyst said.
"This brings the arms race up a notch."
As well as the big firms, there are plenty of private producers of HR software, such as Silicon Valley Workday, founded by ex-PeopleSoft executives, which filed for an initial public offering recently.
IBM is expanding in the fast-growing field of delivering business applications through the Web as its new CEO Ginni Rometty looks to make her imprint on the 100-year-old company that is widely considered one of the world's most conservative computer technology firms.
"IBM has previously suggested the return on software acquisitions is the best it has seen in recent years. We expect continued acquisition activity this year," ISI Group analyst Brian Marshall said in a note.
IBM has focused its highly profitable software division on email, databases, operating systems and "middleware" — programs that make up the plumbing of computer networks. It has shied away from selling applications such as human resources software.
"Following Oracle's move into hardware and SAP's move into the database market, both of which position these leading apps companies more in IBM's traditional markets, IBM has perhaps fewer reservations about participating in the apps and software-as-a-service market," Nomura analysts said.
"The Kenexa acquisition will complement IBM's social business and HR business services leadership," IBM said, adding that it expects the transaction to close in the fourth quarter.
Kenexa has more than 8,900 customers across financial services, pharmaceuticals, retail and consumer industries, it said.
Lazard served as financial adviser for Kenexa on the deal, while Pepper Hamilton LLP was its legal adviser.
(Editing by Rodney Joyce, Joyjeet Das and Supriya Kurane)