IBM plans to buy Sterling Commerce from AT&T Inc for about $1.4 billion in cash to expand its portfolio of software for companies in financial services, manufacturing and retail.

Sterling's software and services help companies securely transfer electronic documents, such as purchase orders, payroll information, invoices and healthcare claims. It is the No. 2 player in the field after privately held GXS Inc.

The market is fairly mature, with low growth in recent years, but with potential for solid profitability, said Thomas Weisel Partners analyst Tim Klasell.

International Business Machines Corp over the past decade has been focusing on improving its profitability by concentrating on high-margin software and services rather than hardware.

It bought PwC Consulting from PricewaterhouseCoopers in 2002 and sold its personal computer business to Lenovo Group <0992.HK> in 2005. It recently announced plans to spend $20 billion on acquisitions through 2015.

Rivals like Hewlett-Packard Co , Oracle Corp and SAP AG have also been scouring for deals as they compete to offer a broad set of products and services to business customers.

Forrester Research analyst Ken Vollmer predicted that Oracle might respond to IBM's move on Sterling by acquiring another provider of such products.

Oracle offers such technology through a partnership with privately held E2open, according to Gartner analyst Benoit Lheureux.

As for AT&T, it is selling Sterling at a substantial discount to the $3.9 billion that SBC Communications paid for the company at the height of the dotcom boom in 2000. SBC subsequently became AT&T through a merger in 2005.

AT&T said it expects to record a one-time gain of about $750 million in the quarter the transaction closes, expected to be in the second half of 2010.

Sterling's 2,500 employees will be part of the WebSphere organization within IBM's Software Group. It was founded in the 1970s and has some 18,000 customers.

Sterling said it enables more than 1 billion business interactions a year for clients in financial services, retail, manufacturing, communications and distribution. Analysts said being part of IBM will help it boost its customer base.

I think Sterling Commerce will get a lot of muscle from IBM that will allow them to better compete with GXS, Forrester's Vollmer said.

IBM has not been alone in bulking up through acquisitions. Hewlett-Packard bought EDS in 2008, and the past few months have also seen a resurgence in M&A deals in the tech sector as the economy recovers.

SAP said earlier this month that it plans to buy smaller business software maker Sybase Inc for $5.8 billion. Oracle last month extended its acquisitive streak with a $685 million deal for drug trial software maker Phase Forward Inc

On the New York Stock Exchange, IBM fell 69 cents to $124.73 and AT&T was down 40 cents at $24.45 shortly before the close.

(Additional reporting by Franklin Paul, editing by Gerald E. McCormick, Derek Caney and Richard Chang)

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