IBM has agreed to buy network management software vendor Micromuse for $865 million in cash.

IBM said the move would allow it to offer its customers better technology for dealing with increasingly mixed traffic in their networks produced by VOIP (voice over Internet Protocol) and other online voice and video services.

The companies hope to close the deal in the first quarter next year subject to approval from Micromuse shareholders and US regulators, they said.

IBM has offered $10 for each Micromuse share, almost 40 per cent above its closing price on Tuesday of $7.21. In early trading on Wednesday, Micromuse stock (ticker symbol: MUSE) jumped more than 35 per cent to reach $9.84.

The network management software market is now a three-horse race between IBM and HP, according to IDC analyst Stephen Elliot. Buying Micromuse fills a technology gap in IBM's portfolio and gives it access to a lucrative OEM (original equipment manufacturer) deal Micromuse has with Cisco, he noted.

"As IBM looks to gain more entry points into enterprise accounts, the Micromuse-Cisco relationship is a critical jewel in this deal," Elliot said.

Video and VOIP

IBM plans to add Micromuse's technology to its line-up of Tivoli management software to help companies better manage services such as videoconferencing for remote workers or streamed music for cell phone customers, it said.

The rise of VOIP and video-on-demand traffic is making networks more complex and organisations need real-time network and service management capabilities, according to IBM. Micromuse's products can also diagnose and fix network outages and performance problems, it said.

Micromuse Chief Executive Officer Lloyd Carney said his company was caught in a "no man's land" between small startups and Goliaths. To compete, it needed scale.

"There's an emerging market tier where we just don't have the breadth of coverage," he said in a conference call with press. Markets like Asia and South America and new industry opportunities such as security management are wide open, ... but only companies with the means to invest in developing infrastructure and skill sets will be able to take advantage of those prospects, Carney said.

"As a stand-alone company, the challenge we faced in competing against the giants like IBM every day led us to realise that the best move for us would be to become part of an organisation," he said. Carney said he will remain with IBM after the deal closes, working under Tivoli General Manager Al Zollar.

Employees offered jobs

Based in San Francisco, the company has about 1,800 customers, including AOL, BT, Deutsche Telecom AG, Fidelity Investments Services and the US Securities and Exchange Commission. Micromuse currently has 650 employees. Zollar said he expects the majority of them will be offered positions at IBM.

Micromuse's revenue for the fiscal year ended September 2005 grew 10 per cent to $160.8 million. Net losses were $3.8 million based on generally accepted accounting principles (GAAP), compared with net income of $4.4 million in fiscal 2004. Micromuse projected that revenue would grow to between $195 million and $200 million for fiscal 2006. It did not forecast GAAP income.

If the deal is approved Micromuse will become a business unit in IBM's Tivoli division. The companies have about 500 joint customers, and have been business partners since 1999, IBM said.

Zollar declined to comment on product road maps, but IBM will have to do some rationalising when the deal closes, IDC's Elliot said. IBM's event management and monitoring software portfolio will include Micromuse's Netcool suite, IBM's Tivoli Enterprise Console and IBM's Tivoli NetView.

"There has to be level of end-of-life discussion, and information about architectural decisions and migration paths," Elliot said.