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IBM Reportedly Peels Off $2 Billion or More for SoftLayer

SoftLayer was considering an IPO last year & even met w/ bankers according to All Things Digital but opted to be bought instead

IBM Tuesday said it's going to acquire SoftLayer Technologies, the Dallas-based outfit that's supposed to be the largest privately held Infrastructure-as-a-Service provider in the world.

Terms were not disclosed but the good ole rumor mill, touched off by a Reuters report in March about how both IBM and EMC were interested in buying SoftLayer, pegged the deal at around $2 billion. Others venture that it could be worth as much as $2.5 billion.

Either amount makes it the largest acquisition of IBM CEO Ginni Rometty's new reign.

Since mid-2010, when the then five-year-old public cloud company was expected to clear $125 million in revenues, SoftLayer has been majority-owned by GI Partners, described as a private trans-Atlantic investment firm. GI got the position in a deal that reportedly left SoftLayer's founding management with enough equity to discourage their leaving.

GI evidently made a smart bet.

SoftLayer was considering an IPO last year and even met with bankers according to All Things Digital but opted to be bought instead. It's easier.

The acquisition is supposed to pit Big Blue against Amazon Web Services, the biggest of the public clouds, believed to have done $2 billion in business last year and expected to do $5 billion or better in 2014 - or close to what IBM has spent since 2007 building up a cloud armory.

IBM means to form a new Cloud Services Division around a free-standing SoftLayer and its 13 data centers in the US, Asia and Europe.

The new division will combine SoftLayer with IBM's SmartCloud portfolio of a hundred cloud-based line-of-business solutions and create a global platform for clients, ISVs, channel partners and technology partners.

The SmartCloud widgetry includes the chi-chi new Watson Engagement Advisor; hybrid solutions such as IBM PureSystems; mission-critical cloud services for SAP on IBM's SmartCloud Enterprise+; and IBM's private cloud solutions.

The unit will report to Erich Clementi, senior vice-president of IBM Global Technology Services, who was previously charged with spotting major growth opportunities and running IBM's cloud computing strategy.

The idea is to strengthen IBM's leadership position in cloud computing, which till now has largely focused on private clouds running in customers' own data centers. IBM is clever about getting the market to follow its lead. Look at what its blessing did for Linux.

In a statement Clementi said, "Our clients are telling us they want to realize the transformative benefits of cloud today - not just for individual applications, but across their entire enterprise. SoftLayer is a perfect fit for IBM. It will help us smooth the transition of our global clients to the cloud faster, while enabling IBM to more efficiently offer them its broad portfolio of open IT infrastructure and software services."

IBM intends to expand SoftLayer cloud offerings to include OpenStack capabilities, a move it pictures as "consistent with its entire SmartCloud portfolio and historic commitment to open standards such as Linux. Given that most companies will mix public and private cloud services, clouds need to interoperate. In that way, firms can better leverage cloud to run their social, mobile and Big Data applications."

IBM says it will support and enrich the SoftLayer cloud-centric partners and ecosystem and its performance capabilities for Big Data and analytics. IBM will provide go-to-market and customizable resources for its expanding cloud ecosystem.

SoftLayer claims to have 21,000 customers and 100,000 servers under management. It offers both dedicated and shared servers. It's those dedicated servers that matter to IBM, which says they're one of the top reasons it chose SoftLayer.

SoftLayer's widgetry provides an easy ‘on ramp' especially for the Fortune 500 to adopt the cloud. It lets cloud services be quickly created on dedicated servers - rather than a virtual ones, which is the norm in the public cloud.

"By building out a cloud on a dedicated server," it says, "a client no longer has to worry about sharing computing resources with other companies - thereby radically improving privacy, security and overall computing performance. By using dedicated servers, software that was built for on-premise use can be ported more easily to the cloud. It doesn't have to go though as much heavy configuration as it does with a virtual server, which it was not developed to work with."

IBM figures that will let it deliver an industry first: "marrying the security, privacy and reliability of private clouds with the economy and speed of a public cloud."

Ah, but there's still more. IBM says the SoftLayer acquisition maps to its larger strategy of transformation and shift to higher value.

"With a strong cloud infrastructure from SoftLayer under our belt that marries the best of private cloud with public, IBM can focus on delivering to clients the higher-level cloud value - business transformation. As such, IBM sees this acquisition as a milestone in changing the cloud discussion from one of reducing ‘IT cost' to impacting the business value by leveraging social, mobile and Big Data for competitive advantage."

And that, children, along with the fact that IBM opens a new market into the enterprise for SoftLayer's so-called born-on-the-cloud customers, is why Big Blue is buying the joint.

It says the vast majority of the Fortune 500, its favorite playmates, "have concerns about how cloud will work with the IT investments they have already made, and many have been waiting for a cloud that is better than ‘good enough.'

"In fact, we know that although cloud is growing quickly, it's still only a small part of the total IT spend. There's a lot of opportunity here for IBM to capitalize on. Industry watchers" - it means Gartner - "tell us that public cloud services will reach $131 billion in 2013. By comparison this year enterprise IT spending will reach $3.7 trillion.

SoftLayer provides infrastructure for cloud-centric, performance-intensive applications in the areas of mobile, social media, gaming and analytics.

IBM said the growing number of businesses incorporating mobile computing is helping drive SoftLayer growth. In the last two quarters, more than 60 new gaming companies have moved to the SoftLayer global platform, frequently migrating from commodity cloud platforms because of problems with cost, latency, availability and raw performance.

SoftLayer's architecture provides technical capabilities such as a software-definable environment critical to a cloud infrastructure, programmable interfaces, and hundreds of hardware and network configurations. It's designed to deliver a higher level of flexibility - mixing virtual and dedicated servers to fit a variety of workloads - interface automation and hybrid deployment options.

SoftLayer's automated networking infrastructure supports public, private and data center-to-data center architectures. Its IT infrastructure connectivity enables connections with leading global network providers and Internet access networks.

IBM will redirect SoftLayer to service more of the enterprise.

Its CEO Lance Crosby said, "SoftLayer has a strong track record with born-on-the-cloud companies, and our move today with IBM will rapidly expand that footprint globally as well as allow us to go deep into the large enterprise market. The compelling opportunity is connecting IBM's geographic reach, industry expertise and IBM's SmartCloud breadth with our innovative technology. Together SoftLayer and IBM expand their reach to new clients - both born-on-the-cloud and born-in-the-enterprise."

IBM expects annual cloud revenue from its SmartCloud portfolio to hit $7 billion by the end of 2014. It currently has 5,000 so-called engagements in its private cloud business.

IBM SaaS solutions for Smarter Cities, Smarter Commerce and other applications will be made available via SoftLayer over time, providing line-of-business clients with improved time-to-value and an increasingly integrated portfolio of solutions that accelerates business process innovation, provides analytics at the point of impact, and connects collaborative business networks within and across organizations.

IBM's got 10 of its own cloud computing centers on five continents.

The acquisition should close in Q3.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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