Published via Inbox: 2013-06-04 23:26:46
Computing giant IBM just made another move in its quest to become the biggest provider of cloud services. It said it will acquire SoftLayer, a privately held cloud services player based in Dallas.
(Update: Sources close to the company are describing the price as “slightly below” the $2 billion mark.)
My Two Cents
IBM is still not buying Rackspace. This time IBM picks up Softlayer as the largest privately held hosting provider. Is MSFT going to get Rackspace? I still believe that IBM is the best place for Rackspace, but what do I know. Back to SoftLayer, what does IBM get: 21,000 customers, 13 data centers in the US, Asia and Europe. They also get $300 - $350 million in annual gross revenues (mostly hosting; not cloud), but I nitpick. They also get an estimated $130 - $140 mm in EBITDA from SoftLayer. Not bad. The rumors are percolating that IBM spent just under $2.0 Billion. That means the multiplier on EBITDA was only 13.5 (thereabouts). This tells me a few things:||(1) IBM got a bargain,
(2) that the Private Equity group GI Partners didn't want the mess of an IPO, and
(3) that something is messy under the hood about SoftLayer (pricing doesn't make sense to me).
IBM Due Diligence
When IBM buys a company, they know what is under every rock in the company. Nothing is not turned over by their due diligence team. All things considered, this deal sounds like a win-win situation imho. Also don't be surprised if IBM continues their acquisition binge in the world of cloud services, but buying Rackspace (if they do) will not be priced at these levels. ||PS: just analyzed the Rackspace financials -> Rackspace can't afford to sell right now. Top line is nice at $1.3 Billion, but EBITDA is just above the SoftLayer totals at approximately $172 million. However, Rackspace has over 200,000 customers (an order of magnitude larger than SoftLayer (don't know about the specific profile of either of these customer bases).
Also side note:
EMC losing SoftLayer to IBM is actually a double-loss. EMC as the proud owner of VMware would seemingly have no interest in Rackspace b/c Rackspace and OpenStack are so tightly intertwined and OpenStack is a direct threat to VMware. This could be the first of a Texas two-step for IBM. Maybe EMC's interest in SoftLayer necessitated buying SoftLayer first and now Rackspace is up next? Who knows in the world of Cloud Wars!
Last note:
IBM's acquisition of SoftLayer and SoftLayer's $300-$350 mm in gross revenue helps towards the goal of $7 Billion in cloud-driven revenue. In this same All Things Digital article, IBM boasts of cloud-driven revenue being up 80% in the the last year, but that's still based on the small number that IBM started from. However, as IBM continues to buy its way into cloud or hosted computing verticals, like Kenexa (total gross revenues about $400 mm at time of acquisition), Big Blue gets closer and closer to hitting their $7B target. This will become especially powerful when the IBM worldwide sales force (the greatest on the planet) will grow from this base. IBM is not a cloud-child anymore. IBM is a powerful cloud force and they will leverage the tried and true business models of these acquired companies.
IBM Cloud Boxes Check and Boxes that remain to be checked:
Consumer Based Web Hosting -> SoftLayer = Check||HR in the Cloud -> Kenexa = Check
To Be Determined:||CRM in the cloud -> SugarCRM = TBD, but this one makes all the sense in the world!
Private Cloud Hosting and OpenStack expertise-> Rackspace = TBD (An interesting fight with MSFT or Oracle as an outlier); I still think this is an IBM company.
Social Software -> Jive = TBD (IBM already has Connections), but you never know!
The Brilliance of IBM's Executive Team
To state the obvious to anyone who does not know this already, IBM's executive team is super-savvy. As I see it from the outside looking in, IBM is methodically rolling up cloud-based verticals upon which their sales force can exert their will and close deals. To summarize, if by the end of 2013, IBM has approximately $3B in cloud or hosted gross revenue attributable by acquisition or by organic growth, then by the end of 2015, they hit $7B without problem. Once again, IBM executes on its plan and its guidance to the market. Expect IBM stock to continue to soar! Wow. The more you research IBM's leadership, the more compelling of a company it becomes.
