International Business Machines (IBM -1.05%) made a multi-billion-dollar bet on data and the Internet of Things in 2016 with the acquisition of The Weather Company's business-to-business, mobile, and web properties. While IBM never disclosed the price tag, the deal was estimated at over $2 billion.
The rationale for the acquisition revolved around data. The Weather Company's corporate clients used the company's data, collected from public sources as well as nearly 150,000 small weather stations, in a variety of ways. Airlines used it to minimize the impact of turbulence, and insurance companies used it as a risk assessment tool.
Since that deal, IBM's strategy has shifted. The company has narrowed its focus to two areas: Hybrid cloud computing and artificial intelligence. Through its software, hardware, and consulting segments, IBM helps enterprise customers increase productivity and decrease costs through its broad cloud and AI offerings.
Throwing in the towel
IBM announced on Tuesday that it had agreed to sell The Weather Company's assets to Francisco Partners. The terms of the deal weren't disclosed, which almost certainly means that IBM is taking a substantial loss. In April, The Wall Street Journal reported that IBM was exploring a sale that could fetch around $1 billion, about half what the company reportedly paid.
While the acquisition made some sense for IBM back in 2016, it included consumer-facing applications and websites. IBM is very much not a consumer-facing company. While these digital properties bring in 415 million visits each month, they just don't mesh with the rest of IBM's business. Those heavily trafficked properties likely provided little value to IBM.
IBM's reasoning for selling the weather business comes down to its hybrid cloud and AI strategy. The company has been investing heavily in both technologies, including the blockbuster $34 billion acquisition of Red Hat in 2019. As a stand-alone company owned by Francisco Partners, The Weather Company will get the resources and attention it needs to expand beyond forecasting and bring new functionality to users and businesses.
IBM's strategy is starting to work
While The Weather Company acquisition is hard to view as anything other than a mistake, IBM appears to be turning the corner after nearly a decade of transformation. The company is growing revenue against a difficult economic backdrop, and it's expanding its free cash flow generation. The company expects 3% to 5% revenue growth this year adjusted for currency, along with a $1 billion bump in free cash flow to $10.5 billion.
IBM is seeing a slowdown in demand for discretionary projects, but demand for larger transformational projects remains strong. In an uncertain economy, enterprise customers want projects that can deliver significant returns on investment. That's exactly what IBM's hybrid cloud platform can deliver, and the company's consulting arm is there to help guide clients to the right set of solutions.
With the sale of The Weather Company, IBM is getting out of another line of business that just never worked well as part of the century-old tech giant. In early 2022, the company sold most of its Watson Health business, comprised of a series of pricey acquisitions that failed to deliver. Francisco Partners was the buyer in that case as well.
As IBM sheds non-core businesses that no longer make sense as part of its hybrid cloud and AI strategy, the company frees up resources to go after its best growth opportunities. A more focused, less sprawling IBM is much more likely to succeed.
