How cloud computing is helping IBM, Salesforce

A decade ago, the mere idea of cloud computing was a difficult concept to explain, let alone sell. Today, the technology is spurring a high-stakes scramble to buy some of the early leaders in the cloud-computing movement. 

The latest examples of the trend emerged as two major technology companies announced acquisitions aimed at seeding their own clouds. 

Cloud-computing pioneer Salesforce.com said it will spend about $2.5 billion to buy ExactTarget, a specialist in helping other companies manage marketing campaigns and other business functions through email, social networks and a variety of digital services that can be reached on any device with an Internet connection.

The more time-tested IBM is snapping up SoftLayer Technologies, a privately held company that leases extra computing horsepower to startup companies and medium-size businesses that don't have the resources or desire to build their own data centers. IBM didn't disclose the financial terms of the deal, but The Wall Street Journal pegged the cost at about $2 billion. The Journal cited an unidentified person familiar with the matter. 

ExactTarget, based in Indianapolis, and SoftLayer, based in Dallas, are just the latest in a batch of billion-dollar babies hatched by what was once viewed as a kooky craze. 

Cloud computing refers to the practice of renting software and other computing accessories over the internet, an approach that once seemed to out of step with the long-standing policies of corporate customers and government agencies who preferred to own their machines and the applications running on them. 

But that sentiment has changed in the past six years as the popularity of powerful smartphones and tablet computers has driven the demand for services that can be reached from any internet-connected device. 

The phenomenon has helped propel cloud computing, and driven lucrative deals in the space. In the past two years alone, long-established technology companies such as IBM, Oracle and SAP AG have each spent several billions of dollars acquiring cloud-computing vendors. 

"Deals begat deals," said Peter Falvey, a Boston investment banker specializing in technology. "There are no doubt other companies now saying, `What else is there to buy out in this space?' It's all part of the maturation process." 

Questions are already being raised whether the buyers are getting overzealous and paying too much. 

Investors seemed particularly troubled by Salesforce's decision to buy ExactTarget for $33.75 - 53 per cent above ExactTarget's market value before the deal was announced. It's a steep premium for a company that has suffered losses in each of the past four years, including nearly $58 million since the end of 2009. 

Wall Street's misgivings about the deal caused Salesforce's stock to plunge $3.24, or 7.9 per cent, to close Tuesday at $37.80. It was the steepest one-day decline in the stock in 13 months. 

ExactTarget's setbacks came during a period of rapid growth. The company's annual revenue climbed from $72 million in 2008 to $292 million last year while its payroll has ballooned from under 400 employees in 2008 to nearly 1,700 now. 

Salesforce expects ExactTarget to trim its adjusted earnings during its current fiscal year ending in January 2014 by 16 cents per share. The deal is expected to close by the end of next month. 

Salesforce CEO Marc Benioff has become accustomed to shaking off the skeptics. He was frequently mocked when he started his San Francisco-based company in 1999 and boldly predicted its model for leasing business software applications would revolutionize the technology industry. Even after Tuesday's sell-off, Salesforce now boasts a market value of $22 billion. Benioff's personal fortune stands at an estimated $2.6 billion. 

Benioff, an executive known for sweeping statements, hailed the ExactTarget deal "as really a historic date for cloud computing" during a Tuesday conference call for analysts. He is counting on ExactTarget to help Salesforce sell more marketing services on mobile devices. As part of its marketing expansion, Salesforce previously spent nearly $1.1 billion to buy Buddy Media and Radian6 Technologies during the past two years. 

Once the ExactTarget deal is completed, Benioff said Salesforce plans to take a "vacation" from deal making for 12 to 18 months. 

"That's really because we're going to double down and focus on the success of ExactTarget," Benioff assured analysts.