International Business Machines Drops Another BIllion on Watson

By the time IBM (NYSE:IBM) announced plans to invest $1 billion to begin a separate business unit around its super-computer Watson in early 2014, the cognitive-computing wonder had already gained notoriety by beating Jeopardy champs at their own games. Despite the futuristic-like ability to “learn,” and all the potential that it entails, some may have considered IBM’s investment in Watson — and by extension, big data — overly ambitious.

As it turns out, not only is big data, which is essentially the collection and collating of vast amounts of information, expected to become a huge industry in and of itself, the “predictive analytics” or machine learning that’s associated with big data will skyrocket and become a necessity for businesses from virtually every industry. According to IDC, the market for tools to analyze big data will grow 30% annually for each of the next five years, and the use of predictive analytics will grow 65% faster than apps without that capability.

IBM’s decision to invest heavily in Watson hasn’t waned. In fact, its latest acquisition demonstrates IBM’s financial commitment to cutting-edge analytics. It’s directly in line with its strategic plans to dominate in a marketplace ripe for big data and cognitive-computing solutions.

The deal
Cognitive computing and predictive analytics generally conjure up images of a Watson-like computer able to sort through mass amounts of numerical and similar data, determine patterns, and develop actionable results. If mistakes are made during the analytical process, Watson is able to learn from those mistakes — meaning that the results of its analyses continually improve.

But Watson’s capabilities don’t stop with traditional forms of data. Watson is also able to identify, analyze, and learn from images. This brings us to IBM’s latest acquisition: the $1 billion deal to buy medical-imaging leader Merge Technologies (NASDAQ:MRGE). Watson’s ability to “see” is one reason why IBM is targeting the medical industry via its new, super-computing business unit Watson Health.

Assuming the acquisition meets regulatory approval and agreed to by Merge shareholders, IBM will pay $7.13 per share in cash, bringing the total value of the deal to about $1 billion. If there are no hiccups, IBM expects to close the deal later this year. Merger marks the third healthcare-related deal for its new-ish Watson Health unit this year, and is easily the largest.

Why the emphasis on the medical field? An estimated 90% of health-related data are images, and the sheer volume makes manual analysis increasingly difficult and time-consuming. Now, with Watson able to perform that analysis to review and prioritize images — as well as cross-reference the image data with literally billions of traditional data sets for Merge’s more than 7,500 clinics and hospitals — physicians will have instant access to a treasure trove of critical data.

Going forward
The Merge platform is cloud based, meaning it will expand Watson’s reach within the fast-growing healthcare market, and boost another one of IBM’s “strategic imperatives.” IBM’s cloud revenue climbed more than 50% again last quarter, and at an annual run rate of $4.5 billion, it’s quickly becoming one of the industry’s cloud leaders. As Watson and its cloud-based wins continue piling up, two of CEO Ginni Rometty’s strategic imperatives will benefit: business analytics and cloud services.

But combining with Merge and its imaging technology platform, not to mention its more than 7,500 existing clients, are still early steps in Watson’s evolution. As one IBM exec put it, “As Watson evolves, we are tackling more complex and meaningful problems by constantly evaluating bigger and more challenging data sets.”

Kelly added, “Healthcare will be one of IBM’s biggest growth areas over the next 10 years.” It’s telling that Kelly didn’t say “Watson’s biggest growth areas,” but “IBM’s.”

And why not? With Watson’s ability to “see,” in addition to its learning and cognitive computing capabilities, and the inroads already being made as evidenced by inking deals with major healthcare giants like Merge, the long-term potential of IBM’s Watson unit is limitless.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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