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Wednesday, June 5, 2013

I.B.M. Buys Cloud Computing Firm in Deal Said to Be Worth $2 Billion

3:29 p.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.

As businesses demand more services delivered over the Internet, the titans of technology are stepping up their offerings delivered from data centers afar, so-called cloud computing.

I.B.M. made a big move on Tuesday, announcing that it had agreed to buy SoftLayer Technologies, a cloud computing company, in an effort to strengthen its position in the fast-growing market.

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.

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

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 for I.B.M. cloud services.

I.B.M.’s first moves in the cloud market date 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 â€" the so-called public cloud model.

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 SoftLayer data centers will be added to the 10 cloud services data centers I.B.M. now has worldwide. Erich Clementi, a senior vice president for I.B.M.’s 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 had 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.

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 to 98 percent from 75 percent â€" 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 that its cloud business should reach $7 billion, including private and public cloud services.

All the major technology companies â€" including Microsoft, EMC, Hewlett-Packard and Oracle â€" 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.”

This post has been revised to reflect the following correction:

Correction: June 4, 2013

An earlier version of this article misspelled the surname of a senior vice president for I.B.M.'s technology services unit. He is Erich Clementi, not Clement.