IBM To Pay $182M In Cash For Corio

Founded in 1998, and backed by venture capital heavyweight Kleiner Perkins Caufield and Byers, Corio is among the ASP pioneers delivering enterprise applications over the Internet. Today, the San Carlos, Calif., hosting provider delivers applications from vendors such as Ariba, Oracle, PeopleSoft, SAP and Siebel Systems. In effect, the purchase gives Armonk, N.Y.-based IBM five new data center facilities, including one in the heart of Silicon Valley.

Corio claims to have 28 systems integrator partners. Now the question arises: What will happen to them when Corio becomes part of the IBM Global Services division, which runs its on demand hosting business?

"I haven't received a briefing on the transaction yet. I had to hear about it through the news," said Marc Hebert, executive vice president of marketing and alliances at Sierra Atlantic, Fremont, Calif. As a Corio partner, the services company supplements Corio's own technical staff--providing offshore level 2 and 3 support for Oracle and PeopleSoft applications, and field help for Oracle implementations.

"We are an IBM partner, although we haven't done any on demand work for them," said Hebert. "IBM does use partners to supplement their resources. So this [deal] could affect our staffing levels. There's the risk we could lose the business if IBM tries to bring it all in-house, and there's the opportunity that it could grow. I just don't know yet what that will be."

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Hours after announcing its acquisition, IBM made an effort to assuage Hebert's concerns. "Those Corio partners serve midmarket clients, and we absolutely want them to become IBM partners, and keep doing exactly what they're doing today to serve our clients," said Mike Riegel, director of On Demand for IBM Global Services. "We want them as IBM partners, and we'll say more about this at Partnerworld at the end of February."

Despite its longtime role in the ASP market, the 300-person Corio has shown only modest success. Corio has had five consecutive years of losses in annual net income. In its third quarter ended Sept. 30, 2004, it reported a loss of $4.3 million, or 7 cents per share, compared with a loss of $2.3 million, or 4 cents per share, in the third quarter of 2003. Revenue rose to $17.8 million from $15.5 million in the same period last year.

Clearly, IBM is not spending $182 million for Corio's existing revenue stream. "Corio has a great team of professionals in their data centers and management team who understand these hosted applications and know how to make them scale," said Riegel. "They also have configuration tools that other ASPs never invented. Essentially, what we're buying is Corio's tools and people, and we will complement them with the scale of IBM."