Acquisitions/Divestitures:

9 Months Ended

Sep. 30, 2013

9. Acquisitions/Divestitures:

Acquisitions: During the nine months ended September 30, 2013, the company completed seven acquisitions at an aggregate cost of $2,734 million.

SoftLayer Technologies, Inc. (SoftLayer) – On July 3, 2013, the company completed the acquisition of 100 percent of the privately held company, SoftLayer, a cloud computing infrastructure provider based in Dallas, Texas for cash consideration of $1,977 million. SoftLayer joins the company’s new cloud services division, which combines SoftLayer with IBM SmartCloud into a global platform. The new division will provide a broad range of choices to both the company’s and SoftLayer clients, ISVs and channel and technology partners. Goodwill of $1,284 million has been assigned to the Global Technology Services ($1,245 million) and Software ($39 million) segments. It is expected that none of the goodwill will be deductible for tax purposes. The overall weighted average useful life of the identified intangible assets acquired is 7.0 years.

Other Acquisitions - The Software segment completed acquisitions of five privately held companies: in the first quarter, StoredIQ Inc. (StoredIQ) and Star Analytics, Inc. (Star Analytics); in the second quarter, UrbanCode Inc. (UrbanCode); and in the third quarter, Trusteer, Ltd. (Trusteer) and Daeja Image Systems, Ltd. (Daeja). Systems and Technology (STG) completed one acquisition: in the third quarter, CSL International (CSL), a privately held company. All acquisitions were for 100 percent of the acquired companies.

The table on page 35 reflects the purchase price related to these acquisitions and the resulting purchase price allocations as of September 30, 2013:

		Amortization					Other
(Dollars in millions)		Life (in yrs.)			SoftLayer		Acquisitions
Current assets				$	80	$	70
Fixed assets/noncurrent assets					301		18
Intangible assets:
	Goodwill		N/A		1,284		551
	Completed technology		5-7		290		126
	Client relationships		7		245		59
	In-Process R&D		N/A		2		—
	Patents/trademarks		2-7		75		22
Total assets acquired					2,277		846
Current liabilities					(56)		(20)
Noncurrent liabilities					(244)		(69)
Total liabilities assumed					(300)		(89)
Total purchase price				$	1,977	$	757

N/A - not applicable

In addition to SoftLayer, each acquisition further complemented and enhanced the company’s portfolio of product and services offerings. The acquisition of StoredIQ advances the company’s efforts to help clients derive value from big data. The combination of the company’s and Star Analytics’ software will advance the company’s business analytics initiatives. UrbanCode automates the delivery of software, helping businesses quickly release and update mobile, social, big data and cloud applications. CSL deepens the consolidation cloud capabilities by offering simplified management of the virtualization environment. Trusteer extends the company’s data security capabilities further into the cloud, mobile and endpoint security space. Daeja delivers software that helps employees across all industries, especially data intensive ones such as banking, insurance and healthcare, get faster access to critical business information, and complements the company’s big data capabilities.

Purchase price consideration for these acquisitions as reflected in the table above, is paid primarily in cash. All acquisitions are reported in the Consolidated Statement of Cash Flows net of acquired cash and cash equivalents.

The acquisitions were accounted for as business combinations using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity was recorded at their estimated fair values at the date of acquisition. The primary items that generated the goodwill are the value of the synergies between the acquired companies and IBM and the acquired assembled work-force, neither of which qualify as an amortizable intangible asset. For the “Other Acquisitions”, the overall weighted-average life of the identified amortizable intangible assets acquired is 6.5 years. These identified intangible assets will be amortized on a straight-line basis over their useful lives. Goodwill of $538 million has been assigned to the Software segment and goodwill of $13 million has been assigned to the Systems and Technology Group segment. It is expected that approximately 3 percent of the goodwill will be deductible for tax purposes.

On October 25, 2013, the company completed the acquisition of The Now Factory, a privately held company based in Dublin, Ireland. The Now Factory is a provider of analytics software that helps communications service providers (CSPs) deliver better customer experiences and drive new revenue opportunities. At the date of issuance of the financial statements, the initial business combination accounting was not complete for this acquisition.

On October 2, 2013, the company completed the acquisition of Xtify, Inc., a leading provider of cloud-based mobile messaging tools that help organizations improve mobile sales, drive in-store traffic, and engage customers with personalized offers. At the date of issuance of the financial statements, the initial business combination accounting was not complete for this acquisition.

Divestitures:

On September 10, 2013, IBM and SYNNEX announced a definitive agreement in which SYNNEX will acquire the company’s worldwide customer care business process outsourcing services business for $505 million, consisting of approximately $430 million in cash, net of balance sheet adjustments, and $75 million in SYNNEX stock, which represents less than 5 percent equity ownership in SYNNEX. As part of the transaction, SYNNEX will enter into a multi-year agreement with the company, and Concentrix, SYNNEX’s outsourcing business, will become an IBM strategic business partner for global customer care business process outsourcing services.

The transaction will be completed as soon as is practical, subject to the satisfaction of regulatory requirements and customary closing conditions. The transaction is expected to be completed in phases, with the initial closing expected within several months, and subsequent closings by the end of 2014, subject to similar conditions, local agreements and the information and consultation process in applicable countries. The company expects to recognize a total pre-tax gain on the sale of between $125 million and $175 million. This gain will be recognized consistent with the closing schedule for the transaction. See page 71 for additional information regarding the impact of the gain on the company’s earnings expectations. The company’s worldwide customer care business process outsourcing services and industry process services are included in the Global Technology Services segment. In 2012, the divested business delivered $1.3 billion of revenue, approximately 1 percent of the company’s total revenue, and $0.1 billion of pre-tax income.

In the first quarter of 2013, the company completed the divestiture of its Showcase Reporting product set to Help/Systems. Showcase Reporting, which was acquired by the company through the SPSS acquisition in 2009, is an enterprise-class business intelligence platform that enables customers to build and manage analytical reporting environments. This transaction was not material to the Consolidated Financial Statements.