IBM Strengthens Cloud Portfolio

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International Business Machines Corp.’s (IBM) latest acquisition of SoftLayer Technologies Inc. is expected to strengthen its cloud services portfolio. The acquisition will allow IBM to upsell and cross sell its cloud-based products and services to SoftLayer’s customers while gaining new ones.

IBM will integrate SoftLayer into its new cloud services division – IBM SmartCloud – which provides a wide range of cloud-based products and services to business enterprises. The acquisition will also strengthen IBM’s 100 strong software-as-a-service (SaaS) business solutions.

The combined services will provide the infrastructure for implementing cloud computing, but in a cost effective way. It will also accelerate the integration of public and private clouds. Moreover, it will provide customized privacy, data security and computing services to its clients.

IBM is seeing strong demand for its cloud-based solutions, which is indicated by the fact that its cloud revenues increased 80.0% in 2012. Buoyed by this robust demand, IBM expects to earn $7 billion in revenues from cloud-based services by 2015-end.

Moreover, IBM expects to spend about $20 billion on acquisitions through 2015. The company is looking for strategic acquisitions to remain competitive and gain from the increased spending on cloud-based services. Gartner expects global spending on public cloud services to grow at a CAGR of 17.7% (2011-2016). It also expects the total market to grow from $76.9 billion in 2010 to $210 billion in 2016.

Thus, we believe that the IT major remains well positioned for long-term growth based on its four key growth initiatives: smarter planet, growth markets, business analytics and cloud computing, which are expected to deliver at least $50 billion in revenues by fiscal 2015. We also believe that IBM’s strong product pipeline, expansion into emerging markets and continuous acquisitions will help it to achieve its growth target, going forward.

However, we remain cautious on the overall IT spending environment and believe that macroeconomic concerns will continue to hurt IBM’s growth in the near term. Increasing competition from Accenture (ACN), Hewlett-Packard (HPQ) and Microsoft (MSFT) is an additional headwind for the company.

Currently, IBM has a Zacks Rank #3 (Hold).

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