November 24, 2020

DealBook: I.B.M. Buys Cloud Computing Firm

The acquisition of SoftLayer is the largest deal that I.B.M. has made so far under the leadership of Virginia M. Rometty, who became chief executive in January 2012.Feature Photo Service for IBMThe acquisition of SoftLayer is the largest deal I.B.M. has made under the leadership of Virginia M. Rometty, who became chief executive in January 2012.

9:51 a.m. | Updated

I.B.M. announced on Tuesday that it had agreed to buy SoftLayer Technologies, a cloud computing company, in an effort to strengthen I.B.M.’s position in the fast-growing market for computing sold to businesses as a service delivered over the Internet.

The purchase price was not disclosed. But it was about $2 billion, according to a person told of the negotiations, who has asked not to be named because he had not been authorized to speak publicly about the terms.

SoftLayer, a private company based in Dallas, has a network of 13 data centers in the United States, Singapore and Amsterdam, and revenue of about $400 million a year. GI Partners, a private equity fund based in Menlo Park, Calif., is the majority owner of SoftLayer.

The acquisition is the largest made under the leadership of Virginia M. Rometty, who became chief executive in January 2012. The move, analysts say, also gives I.B.M. a broader presence in the business of cloud computing services.

I.B.M.’s first moves in the cloud market date back to 2007. But its early emphasis, analysts say, had mainly been on so-called private clouds, in which the computing is delivered to users as service over the Internet but from data centers owned by I.B.M.’s corporate customers.

But the SoftLayer acquisition will sharply expand I.B.M.’s capability to deliver computing services remotely to customers from I.B.M. data centers – the so-called public cloud model.

The SoftLayer data centers will be added to the 10 cloud services data centers I.B.M. now has worldwide. Erich Clement, a senior vice president of I.B.M. technology services unit, said SoftLayer “completes our portfolio.” It expands I.B.M.’s public cloud operations, he said, while adding expertise and technology for private clouds and hybrid services, which blend the public and private models.

Lance Crosby, chief executive of SoftLayer, said his company’s long-term goal has been to become “the de facto and most flexible platform for Internet cloud computing. And we couldn’t get there on our own.” I.B.M., he said, has the financial resources and relationships with corporate customers to accelerate the adoption of its cloud technology.

Amazon is the leader in the public cloud arena, and its roster of customers includes not just start-ups and research projects, but also large companies like Netflix.

Amazon does not break out the revenue for its cloud business, Amazon Web Services, but it is growing fast. The unit had estimated revenue of $2 billion last year, according a recent research report from Barclays, which forecast that Amazon’s cloud business would reach $5 billion or more by 2014.

I.B.M. executives say its strategy is to compete in the public cloud market not with basic computing capabilities like processing and storage, but with software for marketing, procurement and customer service delivered as cloud offerings. Since 2007, the company has spent $4.5 billion on more than a dozen acquisitions to build up its cloud software and services offerings.

“We’re focusing on business services that leverage the cloud model,” said Ric Telford, vice president of I.B.M. cloud services.

Beyond the acquisitions, I.B.M. hopes to offer the company’s homegrown technology as cloud services, like its Watson artificial-intelligence software, which I.B.M. announced last month was being tailored as a smart customer-service assistant.

“Watson has a lot more potential because of the cloud delivery model,” Mr. Telford said.

Dannon, the yogurt maker, is a cloud services customer that reflects the I.B.M. strategy. It uses I.B.M. public-cloud software for optimizing its pricing, promotions and product planning. The cloud software has helped Dannon’s sales planning teams improve the percentage of products sold to consumers from 75 percent to 98 percent – crucial for a food stuff with a limited shelf life. The software was developed by DemandTec, which I.B.M. acquired last year.

In new projects, Dannon, owned by the French company Danone, is now pursuing a “cloud first strategy,” said Timothy Weaver, the chief information officer.

I.B.M. has earmarked its cloud business as an area for investment and growth. That business grew 70 percent in the first quarter of 2013 from the quarter a year earlier. By 2015, I.B.M. has forecast its cloud business should reach $7 billion, including private and public cloud services.

All the major technology companies – including Microsoft, EMC, Hewlett-Packard and Oracle – are pursuing cloud strategies. But analysts say I.B.M., perhaps more than any other company, can assure corporate customers to feel comfortable putting their business information in remote data centers and buying public cloud services.

More than a decade ago, I.B.M. demonstrated that endorsement effect, when it made a big commitment to Linux, the open-source operating system, helping it become a mainstream technology in corporate data centers.

“I.B.M. is very much a trusted brand here,” said Steven Milunovich, an analyst at UBS Securities. “Once they show up, they tend to have a big impact.”

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Global Economy Is Looking Brighter, World Bank Says

WASHINGTON — Some of the darkest clouds threatening the global economy have started to lift, according the World Bank’s periodic update to its economic forecasts.

The latest version of the twice-yearly Global Economic Prospects report is one of the development bank’s least pessimistic in recent years, but hardly an exercise in optimism. It describes a “dramatic” easing of financial conditions around the world, stemming in part from policy changes to soothe the bond markets in Europe. Still, it warns that global growth will continue to be sluggish for years to come.

In the report, the World Bank estimates the world economy grew just 2.3 percent in 2012. It expects growth to pick up only modestly in the coming years, from 2.4 percent in 2013 to 3.3 percent in 2015.

Developing countries were responsible for more than half of global growth in 2012, the report said, and they will continue to be an engine of growth. The report estimates that developing countries grew 5.1 percent in 2012, and that the pace of growth will accelerate to 5.8 percent in 2015.

“Four years after the crisis, high-income countries are still struggling,” Andrew Burns, the report’s lead author, said in an interview. “Developing countries need to respond to that difficult environment not through fiscal and monetary stimulus, but rather by looking to reinforce their underlying growth potential in order to have sustainably stronger growth going forward.”

For the last four years, developing countries have remained in something of a defensive crouch, World Bank experts said. Their central banks and finance ministries have intently focused on managing the volatile financial and economic conditions emanating from the United States and Europe, and their policy making has focused on the short term.

But credit conditions have eased significantly in Europe, particularly since the European Central Bank, led by Mario Draghi, embarked on a major bond-buying program last year. Growth has started to pick up in the United States, after taking a hit in the second half of 2012 because of uncertainty stemming from the presidential election and the so-called fiscal cliff, a series of automatic spending cuts and tax increases that Congress mostly averted this month.

Now, developing economies need to focus more on their domestic economic troubles, bank economists said. That might mean making long-term investments in infrastructure, education, public health or regulation, rather than focusing on short-term stimulus measures to counteract economic fluctuations from elsewhere around the globe.

“They have spent the past four years reacting to what’s going on in high-income countries,” said Mr. Burns, noting that different developing countries faced significantly different development challenges. “As a result, almost necessarily, they’ve been paying less attention to some of these long-term growth-enhancing reforms that are so necessary.”

The report says that significant downside risks to global growth persist, including stalled progress in solving the European debt crisis, fiscal uncertainty in the United States, a decline in investment in China and spiking oil prices. However, the report said, “the likelihood of these risks and their potential impacts has diminished, and the possibility of a stronger-than-anticipated recovery in high-income countries has increased.”

Developing countries may start to reorient away from a crisis mind-set, the bank said. “The whole discussion has been dominated by the global crisis,” said Hans Timmer, the director of the development prospects group at the World Bank. “It’s logical that you are distracted, but there are several problems with that: If you don’t go back to the reform agenda, you don’t have that growth in the future.”

Weakness in large, wealthy countries continues to weigh on growth in the developing world, the report notes, hitting big exporters in South Asia, for instance. Political turmoil continues to rack the Middle East and North Africa, it said. But economic activity in East Asia has rebounded because of increasing regional trade and domestic demand in China.

In contrast, developed countries, like Germany, Japan and the United States, had growth of only 1.3 percent in 2012. The bank expects that growth to pick up starting in 2014, reaching 2.3 percent by 2015. The bank projects that the euro zone will continue to contract in 2013, reaching sluggish growth of 1.4 percent by 2015.

Global trade in goods and services is a bright spot in the report. Over all, such trade grew just 3.5 percent in 2012. The bank expects trade to jump 6 percent in 2013 and 7 percent by 2015, in no small part because of an accelerating demand from new consumers in big developing countries.

“From hopes for a U-shaped recovery, through a W-shaped one, the prognosis for global growth is getting alphabetically challenged,” Kaushik Basu, the World Bank chief economist, said in a statement. “With governments in high-income countries struggling to make fiscal policies more sustainable, developing counties should resist trying to anticipate every fluctuation in developed countries and instead ensure that their fiscal and monetary polices are robust and responsive to domestic conditions.”

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