Why IBM's $11 Billion Confluent Deal Could Supercharge Its Unique AI Strategy

International Business Machines (NYSE: IBM) is taking a distinctly different approach to artificial intelligence compared to its major tech peers. You won't see IBM plowing untold billions into massive AI data centers. In fact, IBM CEO Arvind Krishna stated in a recent interview with The Verge that he sees little chance of the trillions of dollars in capital spending on AI data centers yielding acceptable returns.

Krishna is still excited about AI, but more so for the positive impact for enterprise clients. In the same interview, Krishna said that he expects AI to unlock trillions of dollars of enterprise productivity. IBM has already booked $9.5 billion in AI-related business, mostly from consulting signings, as the company focuses on delivering AI solutions for its enterprise customers.

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An $11 billion boost to its AI strategy

On Monday, IBM announced its intent to acquire data streaming specialist Confluent (NASDAQ: CFLT). Confluent has built its data and event streaming platform on top of Apache Kafka, a widely used open-source software. Kafka is widely used to link together software systems in a loosely coupled way, acting as a central event hub and eliminating hard-coded dependencies.

In the age of AI agents, which may need to interact with a multitude of tools and data across internal and external systems, Confluent's platform is particularly appealing. Imagine multiple AI agents, each needing access to different tools while sharing information with each other at various points. In a tightly coupled system with direct communication, if one piece of the system hits an error, the whole thing can come crashing down. Using Confluent's event-based platform, AI agents can work independently while still sharing information through a central hub, insulated from failures in other parts of the system.

With the acquisition of Confluent, IBM is adding another foundational piece to its cloud computing and AI stacks. Other pieces include Red Hat, the open-source software company IBM acquired in 2019, and the watsonx platform, which enables enterprise customers to build, deploy, manage, and govern AI models and agents.

Stronger as part of IBM

Confluent is a good fit for IBM partly because both companies are focused on the enterprise. Confluent counts 40% of Fortune 500 companies as its customers, and IBM has long-standing relationships with major enterprises and government organizations worldwide.

IBM expects to achieve meaningful product synergies across its portfolio with Confluent on board. The company can sell Confluent's products to existing IBM customers, and it can sell IBM products and services to non-IBM customers that already use Confluent's platform. IBM expects the acquisition to accelerate its overall revenue growth over time, with free cash flow benefiting in the second year after closing.

IBM is already undergoing an acceleration in revenue, thanks in part to its AI business. Even with inconsistent demand for discretionary tech projects, IBM expects to grow constant-currency revenue by more than 5% this year. That compares to 3% growth in both 2023 and 2024. Confluent's most recent guidance for 2025 calls for revenue of approximately $1.11 billion, up around 20% from 2024.

While $11 billion is a lot of money to spend, IBM is betting that acquiring Confluent and its popular data streaming platform will generate a superior return compared to the capex-heavy strategies of other tech giants. At any rate, the deal aligns well with IBM's AI strategy and enhances its overall product portfolio.

Timothy Green has positions in International Business Machines. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool recommends Confluent. The Motley Fool has a disclosure policy.