IBM today announced its biggest deal to date under its new CEO, Virginia Rometty, who took over last year. The company acquired cloud computing firm SoftLayer to help it compete with Amazon, the leader in public cloud services.
The question is whether the deal will help improve the overall business of IBM, which missed profit expectations last quarter for the first time since 2005. In April, IBM posted a 1% decline in profit and a 5% drop in revenue, an unusual turn of events for a company that has delivered consistent quarterly results for nearly a decade. IBM has been an investor darling, wooing sages like Warren Buffett. Rometty publicly blamed her sales staff for moving too slowly, and the surprising profit decline drove down IBM’s stock by 8%.
The simple explanation is that IBM has fallen behind the times. More corporations are reducing their spending on hardware (for instance, local servers) and other physical technologies in favor of cloud computing and online data storage. In terms of cloud technology, most of IBM’s resources have gone to private clouds, in other words, data centers owned by IBM’s clients. The company has been slowly building out its public cloud capabilities, so the addition of SoftLayer’s 13 data centers will speed up that process.
But IBM has competition. Last month, VMware launched its vCloud Hybrid Service to expand its public cloud offerings. Microsoft, the second market leader in public cloud computing, added a product in April to better compete with Amazon. German software company SAP, an IBM rival, said last month it was rejiggering its management to focus on the growing demand for cloud services.
In cloud-based marketing, Salesforce.com announced today it bought ExactTarget for $2.5 billion, the company’s largest deal to date. IBM will need to play to its strengths to make real headway. Its deft management skills have helped the company in the past, but that puts the onus on new CEO Rometty to make sharp moves. Integrating SoftLayer will be a major test.