Should IBM Buy SoftLayer Or Rackspace?

By samdizzy

IBM (NYSE: IBM) may offer $2 billion to buy SoftLayer, which claims to be the world’s largest privately held cloud services provider (CSP). But I can’t help but wonder: Has IBM also been taking a look at Rackspace (NYSE: RAX), the best-known provider of OpenStack-based cloud services? The answer to that question sounds like a definite maybe.

GigaOm’s Barb Darrow on March 15 suggested IBM has been poking around Rackspace. I’ve known Darrow for several years and I trust her reporting. In some ways, Rackspace could be a better fit for IBM. But in other ways, SoftLayer is the less risky acquisition. Here’s why.

Rackspace is publicly held and a huge proponent of OpenStack. IBM has also made a big OpenStack beg. But here’s the twist: Instead of owning and dominating open source platforms, IBM tends to influence them through strategic partnerships. Back in the late 1990s, IBM gradually built winning relationships with Red Hat and SUSE in the Linux market. IBM ultimately made a $1 billion bet on Linux without outright buying a Linux distribution. 

Risky Move?

Now, apply that example to the OpenStack market, which remains in its infancy. OpenStack has some big-name backers — IBM, Dell, HP, Rackspace. But it lacks a consulting and IT support ecosystem. If IBM acquired Rackspace right now, I suspect it might scale some OpenStack supporters away from the market rather than toward it. The big fear: IBM would try to somehow “control” OpenStack, though such a scenario is highly unlikely.

Now, let’s shift IBM’s acquisition target from Rackspace to SoftLayer. Sure, SoftLayer also supports OpenStack in some areas — but the effort is lower-profile. And SoftLayer is privately held, so IBM could work out buyout terms without major shareholder debates from the sell-side company. 

The Safe Money

Overall, it sounds like IBM is far more serious about SoftLayer at this point — though Talkin’ Cloud doesn’t have direct knowledge of any potential deals. At least not yet…

And by the way: It sounds like SoftLayer’s price tag is about $2 billion. Rackspace’s current market capitalization is a lofty $7.1 billion, as of March 18, 2013. I know IBM likes to open its wallet — but I suspect not that wide.