IBM Pumps Up in Cloud Computing by Buying SoftLayer

Spencer e. Ante| Wsj

International Business Machines Corp. IBM -1.32% said it agreed to buy SoftLayer Technologies Inc., in a deal aimed at beefing up the technology giant’s efforts in cloud computing and taking on Inc. AMZN -0.44% more directly in that fast-growing arena.

IBM didn’t disclose financial terms, but the deal for the privately held, Dallas-based company is worth around $2 billion, a person familiar with the matter said.

The transaction is a large bet in a string of deals by IBM aimed at adapting to a market where clients increasingly prefer to rent computer space rather than take on the burden and expense of buying their own servers, networking gear and other technology. The trend is a challenge to IBM’s big technology-services business, which has made billions of dollars installing, maintaining and upgrading computer systems for clients.

SoftLayer is popular with technology startups and helps fill a gap in IBM’s offerings: renting space to clients on computers the clients don’t own, an area dominated by Amazon. A client, for example, might put its database or website on computer servers operated by SoftLayer rather than buy its own. The company, founded in 2005, has about 21,000 customers and operates 13 data centers in the U.S., Europe and Asia.

Before the deal, IBM had found more traction offering large companies and governments so-called private clouds, systems that the companies typically own and maintain. The acquisition could help IBM compete more aggressively for small and medium-size businesses, and offer a broader range of Amazon-like “public cloud” options to large enterprises.

IBM is reorganizing its cloud offerings around SoftLayer, which will anchor a new division within IBM’s big outsourcing group. The division will start offering the combined services following the close of the deal, which IBM expects in the third quarter.

IBM is banking on cloud computing as a major growth area. In 2011, the company projected that cloud services would generate $7 billion in revenue by 2015, of which $3 billion would be new revenue.

SoftLayer will play a big role in helping IBM meet that goal, and the company will continue to look for other cloud deals, said Erich Clementi, senior vice president for IBM Global Technology Services.

“If something with a similar power comes along, we will look at it,” he said.

Moody’s Investors Service estimated last November that SoftLayer’s revenue for the 12 months ended June 2012 was approximately $364 million. It estimated the company’s operations burned cash after accounting for heavy 2012 capital expenditures, but projected free cash flow would be neutral in 2013.

Barclays BARC.LN -0.33% estimated that SoftLayer is on pace to generate $400 million to $500 million in revenue this year.

SoftLayer Chief Executive Lance Crosby said his company has been attracting more large customers over the last year or two. The deal with IBM will make it easier for SoftLayer to expand around the world.

IBM said it offers more than 100 types of software delivered over the Internet that help companies to manage business functions such as marketing, procurement and online stores, among other things. It recently began offering its Jeopardy-playing artificial intelligence technology Watson as a cloud solution as well.

IBM was advised by Cravath, Swaine & Moore LLP. SoftLayer was advised by Kirkland & Ellis LLP, Credit Suisse Group AG CSGN.VX -0.81% and Morgan Stanley MS -0.70% .


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