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Initially Hostile, IBM and Lotus Turned Friendly Quick

June 12, 1995

NEW YORK (AP) _ It didn’t take long for IBM’s hostile takeover bid to become a friendly deal for Lotus Development Corp.

Lotus agreed to be bought out for $3.52 billion, about $220 million more than International Business Machines Corp. offered when it began the hostile takeover last Monday.

Though the details took a few days to iron out, executives said Sunday that the head of Lotus became serious about the deal a day after IBM’s initial offer.

Lotus chief executive Jim Manzi agreed to proceed with the buyout after meeting IBM’s head Louis Gerstner Jr. for dinner last Tuesday.

Gerstner agreed to raise the purchase price, preserve Lotus’ autonomy and leave Manzi in charge of the Cambridge, Mass.-based company

``We are really delighted at IBM that we and Lotus were able to reach an agreement so quickly,″ Gerstner said Sunday. ``I’m looking forward to Jim’s counsel on a whole host of strategic issues at IBM.″

Manzi said, ``This serves up some very big opportunities that we didn’t have before.″

A key opportunity will be the ability to sell Lotus Notes, the leading product in an emerging niche called ``groupware.″ Because it can run on a variety of computers and companies can customize it, Notes is becoming an important communications and archiving tool for businesses.

With Lotus, IBM also will get the chance to improve its personal computer software business, a market in which it has lagged. Lotus’ application programs, such as word processing and spreadsheet software, include the top-sellers that work with IBM’s OS-2 operating software, a rival to Microsoft Corp.’s Windows.

While the deal gives IBM a chance at taking on Microsoft, which leads the industry through its dominance in operating system programs that run the basic functions of a PC, analysts are cautious about the company’s prospects.

``I don’t know where we get the magic that creates a different competitive situation,″ said Jeff Tarter, editor of Softletter, a newsletter focused on the software industry.

IBM’s initial cash offer of $60 per share was twice Lotus’ market value at the time. They reached agreement at a price of $64 per share. Lotus stock closed at $62.87 1/2 Friday on the Nasdaq Stock Market.

While making the offer in cash, IBM still expects to take a charge against its earnings for the deal. It has not said how much. Lotus may take several years to bring a return to IBM.

``IBM is paying too much but it’s what it took to make the deal go,″ said David Coursey, editor of PC Letter, an industry newsletter. ``They had to come with a price that was face-saving for everyone.″

Gerstner scored a victory in the Lotus deal by retaining Manzi, who will become a senior vice president of IBM. By staying, Manzi can help assure a smooth transition and keep key programmers, the most important asset of a software firm.

Hostile takeovers are rare in the software business because programmers can leave if they don’t like the acquiring firm. Financial terms are usually arrived at with management before a buyout is announced.

Started in 1982, Cambridge, Mass.-based Lotus became successful with its 1-2-3 spreadsheet program, which helped sales of the original IBM PC to businesses. For a time in the mid-’80s, Lotus was the largest PC software maker.

But the company was slow to develop new programs that worked with Microsoft Windows, which began to take off as the leading operating system in 1990. Lotus then fell behind Microsoft in spreadsheet and other office software.

Before IBM and Lotus, the largest merger agreed to in software was Computer Associates International Inc.’s acquisition of Legent Corp. for $2.1 billion. Announced last month, the competitive consequences of that deal are under review by antitrust prosecutors.

The IBM-Lotus deal faces the same scrutiny by the Justice Department but Gerstner reiterated Sunday that the companies are confident the acquisition will be approved because they have few overlapping products.

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