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International Business Machines Corp. (IBM) Makes a Bold Move Into the Cloud with Softlayer Acquisition

Does IBM’s Position Improve?

On paper, this deal has obvious benefits that should materially improve International Business Machines Corp. (NYSE:IBM)’s competitive position. In a technology industry that is ever more reliant on cloud-based platforms and “flexible” server space, IBM’s lucrative but aging mainframe and fixed-server business is beginning to show its age. While large companies undoubtedly still need large, custom-built servers that can be operated in-house, tech start-ups and even medium-sized firms are often unable to make the significant outlays necessary to procure such infrastructure. These fast-growing firms generally turn to IBM’s more nimble, cloud-focused competitors to find solutions to their issues. Simply put, the Softlayer acquisition should establish IBM as a solid cloud-based alternative.

Long-Term Outlook and Possible Plays

While there will still be a place for traditional in-house servers and mainframes for some time to come, these expensive pieces of hardware may soon be relegated to the engine rooms of major Internet companies or security-conscious government agencies and contractors. Meanwhile, smaller and more nimble firms will accelerate their migration to the cloud. International Business Machines Corp. (NYSE:IBM) is now positioned to take advantage of this medium-term trend, and its stock price could benefit as a result.

In sum, this deal does not offer an arbitrage opportunity or special distribution. However, it does offer some interesting synergies that could benefit IBM’s shareholders in the long run. If the company can successfully integrate Softlayer into its operational structure, it may well raise its dividend or use the extra cash flow to fund a program of share buybacks. Investors who believe in the future of the cloud would be remiss not to take a look at this situation.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool recommends Accenture Plc (NYSE:ACN). The Motley Fool owns shares of International Business Machines Corp. (NYSE:IBM). and Microsoft Corporation (NASDAQ:MSFT). Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article IBM Makes a Bold Move Into the Cloud with Softlayer Acquisition originally appeared on Fool.com and is written by Mike Thiessen.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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