IBM (IBM) has gone to the acquisitions well over the past decade to pump up its software business, and with considerable success considering the stock’s annual 13% returns over the past 10 years.
But there has been one hole in its dealmaking strategy: Much of it has been for traditional software operators. While they tend to have sticky customer bases and generate nice cash flows, the emergence of cloud computing has become a nagging issue.
Fortunately, IBM appears to be taking steps to deal with this, starting with the announcement of a $2 billion acquisition of SoftLayer Technologies.
Softlayer, founded in 2005, has turned into a top cloud infrastructure provider, with data centers in Amsterdam, Dallas, Houston, San Jose, Seattle, Singapore and Washington, D.C. The system provides its 21,000-plus customers with customized solutions that are secure and that can scale heavy traffic.
While IBM already has its own data centers, they are more so focused on private clouds — ergo, the technology is for global companies in sectors like healthcare and financial services that have onerous regulatory requirements.
But with SoftLayer, IBM will actually be moving into the market for startups and small-to-medium-size businesses, where there’s a huge opportunity, if the huge success of Amazon.com’s (AMZN) Amazon Web Services is any indication.
IBM probably also is worried that even larger companies are looking at these types of lower-cost solutions. After all, not all their systems need top-of-the-line datacenters. Besides, other major tech operators are getting aggressive in providing hosted services, such as Google (GOOG), VMware (VMW) and Microsoft (MSFT). Even Facebook (FB) might be a factor because of its recent acquisition of Parse.
So yes, the cloud is just too big to ignore. Consider a recent study from IDC, which projects the cloud software market tripling to $67.3 billion between 2011 and 2016. That’s part of the impetus behind IBM’s deal, as well as Salesforce.com‘s (CRM) $2.5 billion purchase of ExactTarget (ET).
The path of least resistance for IBM is mergers & acquisitions rather than building its own cloud presence — as is the case for many other well-heeled, traditional tech giants like Oracle (ORCL), SAP (SAP) and CA (CA).
In terms of possible acquisition targets, other infrastructure operators like Rackspace (RAX) will probably be snapped up. But as I noted in a recent post, there will probably be lots of action for cloud app operators too. Some of the possibilities include Demandware (DWRE), Bazaarvoice (BV) and Millennial Media (MM).
It seems like a pretty good bet that we’ll see healthy consolidation in the cloud space over the next few years.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.