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Lotus OKs a Takeover by IBM for $3.5 Billion : Technology: The deal, if completed, will create a software giant. Antitrust clearance by FTC expected.


SAN FRANCISCO — The computer software industry's first big hostile takeover battle ended swiftly Sunday when Lotus Development Corp. agreed to be acquired by IBM Corp. for $3.5 billion, or $64 per share--a modest premium over the $60 per share that IBM had offered just six days earlier.

In accepting IBM's sweetened offer, Lotus and its strong-willed chairman, James P. Manzi, were bowing to the simple reality that IBM was willing to pay twice what Lotus shares had been trading for on the open market--and no other similarly free-spending suitor was on the horizon.

The deal, if completed, will create a formidable new competitor in the software business, marrying IBM's muscle and strong presence in corporate computing markets with Lotus' PC software technology, most importantly a product called Notes. The combination is still subject to antitrust clearance by the Federal Trade Commission, but most observers expect the deal to be completed.

"Lotus will be a very critical and important part of IBM and IBM's growth strategy," IBM chairman Louis V. Gerstner Jr. said Sunday. Together, industry analysts said, IBM and Lotus should be well-positioned to battle it out with software leader Microsoft Corp.

Contrary to what those close to him had expected, Manzi said he will stay on to run Lotus as a free-standing subsidiary of IBM. He stressed that IBM had agreed to keep Lotus' liberal personnel policies in place and otherwise allow Lotus to run its own show, agreements which he said were crucial in persuading him to support the deal.

"In the process of these negotiations, we have taken care of the employees, our shareholders, and very importantly our customers," Manzi said. "Our intention is to move quickly to bring the value of this combination to the marketplace."

Manzi will become a senior vice president of IBM, reporting directly to Gerstner.

Although cynics were quick to assert that Manzi will probably stay on only for a transition period, gaining the Lotus chief's support--and thereby turning a hostile takeover into a friendly merger--was an important achievement for IBM. There is now much less risk that key employees will depart, and there is no danger of a protracted takeover battle that could disrupt Lotus' operations.

Manzi's quick acceptance of a friendly deal did not look likely on Monday, when IBM launched its surprise $3.3-billion bid. Miffed that he was informed only five minutes before a public announcement and feeling betrayed by Gerstner's decision to proceed against his wishes--Lotus had supported IBM through tough times for both companies--Manzi sounded like a man ready to fight.

"He was just steamed," said one source close to Manzi. Soon, the Lotus chairman was making frantic calls to potential white knights, including AT&T. But IBM's offer, roughly twice the $32.50 at which Lotus' stock closed a week ago Friday, was considered generous, and no one was willing to bid against IBM and its cash reserves of $10.5 billion.

On Tuesday, Manzi called Gerstner, and--after "a short trip to St. Patrick's Cathedral," as he recounted Sunday--he went to Gerstner's New York apartment. The meetings continued on Wednesday, and Manzi soon began seeing the merits of a combination with IBM. Since Thursday, representatives for both companies have been hunkered down in New York hashing out details of the deal.

"Ultimately, Jim is a pragmatist," said an executive close to Manzi. "Once he realized that this was the only option, he was going to negotiate the best deal for Lotus investors, employees and himself."

Indeed, most analysts say the merger makes a lot of sense. The two companies have had a long and close relationship: the Lotus 1-2-3 spreadsheet was the first big hit for the IBM personal computer, and Lotus has continued to develop software for IBM's OS/2 operating system even after others abandoned it in favor of Microsoft Windows.

And IBM is perhaps the ideal company to exploit the opportunities presented by Lotus Notes, a software program that enables groups of people to share documents and otherwise work together electronically. This type of software, known as groupware, is one of the few major segments of the software business that Microsoft is not positioned to dominate.

But making Notes into the groupware standard for large corporations requires two things that IBM has and Lotus lacks: money, and a sales force skilled in selling to the corporate world. Wounded by its battles with Microsoft, Lotus has found itself with dwindling resources to promote Notes: It posted a $17.5-million loss last quarter as revenue from Notes failed to compensate for rapidly declining sales of 1-2-3.

"This serves up some very big opportunities that we didn't have before," Manzi acknowledged on Sunday.

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