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Quick Take

  • IBM announced that it will acquire SoftLayer to increase its cloud services offering in the public cloud domain.
  • This acquisition bolsters IBM’s Infrastructure as a Service (IaaS) offering. IaaS is poised to grow to $38 billion by 2016, at a CAGR of 41.3%.
  • SoftLayer will not only supplement IBM’s existing SmartCloud initiatives, but also bolster its revenues in its storage division augmenting its cloud storage offering.

International Business Machines (NYSE:IBM) said that it has agreed to buy one of the largest cloud computing infrastructure providers SoftLayer. While the financial terms of the deal have not been disclosed yet, The Wall Street Journal said the acquisition is worth around $2 billion, citing a person familiar with the deal. [1]

This acquisition will bolster IBM’s SmartCloud service division and is a significant addition to its cloud based Infrastructure-as-a-service (IaaS) business. It also gives IBM access to SoftLayer’s strong client base of nearly 23,000 corporate and government clients. With this acquisition, IBM can compete more aggressively for small and medium-size businesses with Amazon that offer public cloud options to companies.

IBM, in its 2015 roadmap, has stated that cloud computing will be key drivers for revenue growth and has spent billions of dollars building its cloud business globally having made a number of acquisitions in the past three years that includes Keneax, DemandTec and Sterling Commerce etc.

Infrastructure As A Service Market

According to research firm IDC, IaaS market is poised to grow from $12 billion in 2012 to over $38 billion by 2016. Additionally, Gartner predicts that Infrastructure-as-a-Service (IaaS) will achieve a compound annual growth rate (OTCPK:CAGR) of 41.3% through 2016.

The technology services and global business division of IBM have revenues of nearly $60 billion and makes up 35% of its estimated value. In the past few quarters, IBM’s cloud initiatives have reported growth of over 70%, and are the primary reason for IBM’s revenues stabilizing in its technology and global business services division. IBM has projected that cloud services would generate $7 billion in revenue by 2015, but we expect the top line will be meaningfully higher due to the acquisition and initiatives that IBM has undertaken in the past few years.

Although SoftLayer reported revenues in excess of $280 million in 2010, it is estimated that its current revenues are somewhere between $800 million and $1billion. We expect that SoftLayer’s revenues will grow substantially as now it will have access to IBM’s technology and global reach. Moreover, we believe that Softlayer will complement IBM’s SmartCloud division, which offers enterprise-grade security and reliability with its public cloud services. It will also help IBM expand its OpenStack open-source cloud project by further committing to open standards.

Additionally, this acquisition expedites IBM’s rollout of its cloud storage services over public cloud. Currently, storage services account for $3.6 billion of IBM’s revenue. SoftLayer’s public cloud platform will also help in offering cost effective cloud services to IBM’s emerging market clients that are constrained by lower budgetary spend.

We currently have a $209 Trefis price estimate for IBM, which is in line with the current market price.

Notes:

  1. IBM Pumps Up in Cloud Computing by Buying SoftLayer, Jun 5 2013, www.wsj.com

Disclosure: No positions