IBM buys SoftLayer, creates new cloud division

International Business Machines (IBM) said on Tuesday it would acquire web hosting company SoftLayer Technologies and create a new division for clients interested in so-called cloud services, a move to better compete with larger rivals in the space. 

Executives with IBM and SoftLayer declined to comment on the terms of the deal on a call with reporters. 

Reuters reported in March that IBM, among others, had been in talks to buy SoftLayer in a deal that could fetch more than $2 billion. 

Dallas-based SoftLayer, which leases online storage space to companies, was founded in 2005 and has become what it says is the world's largest privately held website hosting service. The company provides its 25,000 customers, including AT&T and Citrix Systems, with cloud infrastructure. 

The company competes with Amazon's web services business and Rackspace Hosting. 

Like rivals Hewlett Packard and Microsoft, IBM has increasingly invested in cloud services as corporate users move away from costly internal information technology infrastructure. 

IBM has traditionally specialized in assisting large corporate and government users but has been trying in recent years to expand into smaller businesses. 

Aiming big

But Erich Clementi, senior vice president of IBM Global Technology Services, said on a call with reporters that IBM is shooting squarely for the large business segment with this acquisition. 

"We are the largest infrastructure provider to the enterprise world on the planet," he said "That is our focus." 

Over the last few years, web hosting companies have been considered attractive takeover candidates as technology and telecom companies look to improve the performance and cost efficiencies of their cloud computing services for businesses. 

Wells Fargo analyst Gray Powell estimated that the transaction was worth 11.1 times SoftLayer's projected 2013 earnings before interest, taxes, depreciation, and amortization. 

That compares with Rackspace, which is currently trading at 11 times 2013 estimated Ebitda, Powell noted. 

IBM said it expected to gain $7 billion annually in revenue from cloud services by the end of 2015. It created a new division called Cloud Services, which will combine SoftLayer and IBM's existing offerings into a global platform. 

SoftLayer is majority held by GI Partners, which purchased all of the equity in partnership with the company's management in August 2010. 

Data storage equipment maker EMC had been approached about SoftLayer as well. An EMC spokesman said on Tuesday, "EMC was initially approached, uninterested and decided not to bid." 

IBM said it expected the deal to close in the third quarter. Shares of IBM were down about 1% at $206.78.