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IBM to Buy Cloud-Computing Firm SoftLayer for $2 Billion

International Business Machines Corp. (IBM), the world’s largest seller of computer services, agreed to buy SoftLayer Technologies Inc., a cloud-computing storage provider that will help it compete with Amazon.com Inc. (AMZN)

IBM is paying almost $2 billion for Dallas-based SoftLayer, according to a person familiar with the deal, who declined to be named because the financial terms aren’t being released. SoftLayer had $335 million in revenue in 2012, Chief Executive Officer Lance Crosby said in an interview.

IBM plans to add SoftLayer to its SmartCloud unit to create a new Cloud Services division to capitalize on a market that researcher IDC estimates may more than double to $105 billion by 2016 from last year. SoftLayer specializes in public clouds -- data-center networks that manage computing and software for businesses remotely -- where Amazon dominates. IBM is pairing those capabilities with private-cloud operations, building dedicated systems for individual customers.

Starting a new division through acquisition “allows us to get focused,” said Ric Telford, IBM’s vice president of cloud services. “It’s all about acceleration. We had been building out but we saw SoftLayer and the acquisition was too compelling to pass up,” he said.

Photographer: Scott Eells/Bloomberg

International Business Machines Corp. plans to combine Dallas-based SoftLayer Technologies Inc. with its SmartCloud unit to create a new Cloud Services division, helping capitalize on the market’s growth, IBM said in a statement. Close

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Photographer: Scott Eells/Bloomberg

International Business Machines Corp. plans to combine Dallas-based SoftLayer Technologies Inc. with its SmartCloud unit to create a new Cloud Services division, helping capitalize on the market’s growth, IBM said in a statement.

“They have the same capabilities” as Amazon, Telford said of SoftLayer.

While Amazon leads the infrastructure-as-a-service market, it’s growing so quickly that companies from AT&T Inc. (T) to Google Inc. (GOOG) are looking to gain share, said Frank Gens, an analyst at IDC. That market is set to grow to $38 billion in 2016, compared with $12 billion last year, according to IDC estimates.

Revenue Target

IBM has a goal of reaching $7 billion in cloud revenue by 2015, which doesn’t change with this deal. SoftLayer serves about 21,000 customers using a network of 13 data centers in the U.S., Asia and Europe. The company’s client base and public cloud offering would help IBM reach small- and medium-sized businesses.

IBM, which started offering cloud services in 2008, has invested about $4 billion on deals with a software-as-a-service component, the company said.

SoftLayer started looking for suitors about a year ago and has been in talks with IBM for six months, Crosby said.

EMC Approached

EMC Corp., the largest maker of storage computers, said it was also contacted by SoftLayer about making an offer.

“EMC was initially approached, uninterested, and decided not to bid,” Dave Farmer, an EMC spokesman, said in an e-mailed statement.

Oracle Corp. (ORCL) and AT&T looked at SoftLayer as well, said a person familiar with the discussions, who asked not to be named because the information is private. The person didn’t say whether any of those companies made an offer.

Mark Siegel, a spokesman for AT&T, and Deborah Hellinger, an Oracle spokeswoman, declined to comment.

IBM, based in Armonk, New York, expects to complete the SoftLayer deal in the third quarter, setting the stage for the new division to be formed. SoftLayer is majority owned by private-equity firm GI Partners of Menlo Park, California.

Both Crosby and James Sciales, an IBM spokesman, declined to comment on a deal price.

Deutsche Bank AG served as IBM’s financial adviser, while Morgan Stanley and Credit Suisse Group AG advised SoftLayer.

IBM fell 1.3 percent to $206.19 at the close in New York. The shares have advanced 7.6 percent this year.

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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