IBM: Does the DemandTec Deal Indicate Big Blue's Larger Entry to Apps Arena?

International Business Machines Corp. (NYSE:IBM) said on Thursday that it had agreed to acquire software company DemandTec, Inc. (NASDAQ:DMAN) for about $440 million or $13.20 a share.

The acquisition of DemandTec, a provider of cloud-based pricing optimization applications, will extend IBM's Smarter Commerce initiative by adding cloud-based price, promotion and other merchandising and marketing analytics.

This deal comes on the heels of other recent eye-popping transactions in the cloud-based application universe, particularly Oracle's (NASDAQ:ORCL) $1.5 billion acquisition of RightNow Technologies, Inc. (NASDAQ:RNOW) and SAP's (NYSE:SAP) $3.4 billion deal to purchase SuccessFactors, Inc. (NASDAQ:SFSF).

As expected, most investors appear to be focused on the healthy deal price and premium, and they're naturally asking: who's the next likely M&A target in the cloud software sector?, Benchmark Capital analyst Mark Schappel wrote in a note to clients.

The deal could also be the first step for IBM in the applications software market. In the past, IBM was often considered a long shot acquirer for application software vendors given Big Blue's historical focus on the infrastructure software space.

We think a more interesting, but less talked about, part of this deal is IBM's decision to jump into the applications software arena. Though IBM has an active history of software M&A, most, if not all, of Big Blue's past deals have focused on the infrastructure software space, Schappel said.

In the past, IBM purposely stayed away from the applications software sector to avoid potential channel conflict with independent software vendors, such as Lawson Software and JDA Software Group, Inc. (NASDAQ:JDAS), who build their applications on top of IBM's infrastructure software stack.

Given IBM's newfound willingness to move into the applications arena, the analyst said the deal could be positive for the conventional application vendors, particularly JDA Software (NASDAQ:JDAS), Manhattan Associates, Inc. (NASDAQ:MANH), Aspen Technology, Inc. (NASDAQ: AZPN) and Saba Software, Inc. (NASDAQ:SABA).

In our opinion, a stronger argument can now be made to include IBM in the modest pool of potential acquirers for application vendors other than the usual suspects of Oracle, SAP and private equity, Schappel said.