IBM buys Red Hat for $34 billion. Here’s why | Analysis
IBM chair, president, and CEO Virginia Rometty

IBM buys Red Hat for $34 billion. Here’s why | Analysis

Services giant IBM is to acquire Linux distributor Red Hat for $34 billion, in the third largest technology deal in history.

The 25-year-old Linux distie will become a discrete unit in Big Blue’s Hybrid Cloud team, according to an announcement from IBM. The deal brings together the two companies’ shared expertise in Linux, containers/Kubernetes, and (multi) cloud management and automation.

The all-cash acquisition values Red Hat, which distributes and services a branded version of Linux, at $190 a share – against its value before the announcement of $116.

Buying number one

More significantly, it positions IBM as the number one hybrid cloud provider, claimed IBM chair, president, and CEO Virginia Rometty.

“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” she said. “IBM will become the world’s number one hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.

“Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs,” she added. “The next 80 percent is about unlocking real business value and driving growth.

“This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data, and optimising every part of the business, from supply chains to sales.”

IBM believes that the proprietary nature of the big cloud platform providers, such as Amazon Web Services (AWS), Microsoft, and Google, dissuades enterprises from making a bigger move into hosted solutions – despite many big data analytics and AI applications benefiting from being carried out on premise.

“Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise,” said Jim Whitehurst, president and CEO of Red Hat.

“Joining forces with IBM will provide us with a greater level of scale, resources, and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience.”

IBM said it will remain committed to Red Hat’s open governance, open source contributions, participation in the open source community and development model, and to fostering its developer community.

In addition, IBM and Red Hat said they will remain committed to the continued freedom of open source technology, via initiatives such as Patent Promise, GPL Cooperation Commitment, the Open Invention Network, and the LOT Network.

A revenue boost?

Once cleared, the acquisition will be “gross margin accretive within 12 months”, claimed IBM, and will accelerate revenue growth – something sorely needed at the company, whose revenues stalled in its Q3 results, despite 24 percent as-a-service growth.

However, Red Hat’s last reported annual revenues of $2.9 billion were small beans when set against IBM’s $79 billion.

IBM’s and Red Hat’s partnership has spanned 20 years, with IBM serving as an early supporter of Linux, collaborating to develop and grow enterprise-grade Linux and, more recently, to bring Kubernetes and hybrid cloud solutions to enterprise customers.

“Today’s announcement is the evolution of our longstanding partnership,” continued Rometty. “This includes our joint Hybrid Cloud collaboration announcement in May, a key precursor in our journey to this day.”

So what’s behind a deal that could have been made years ago?

Internet of Business says

Some may indeed question why ongoing partnership wasn’t enough for IBM, and why it felt the need to make a statement deal with an open source provider. Others may wonder whether the acquisition may seek to force Power development on the Red Hat team.

Others still may question whether there may be a culture shock in store for Red Hat workers as they join the definitive blue-shirt and chinos enterprise, which outsources a lot of grunt work to the lowest-cost offshore locations.

So why has IBM paid over the odds for a quarter-century old Linux distie?

As is often the case with statement deals today, the eminence grise may be China, along with the apparently unstoppable rise of the big three cloud providers: AWS, Google Cloud, and Microsoft Azure, which has left IBM Cloud languishing at number four in the enterprise.

Red Hat has partnerships in place with all of the big three, while in October 2017, China’s Alibaba Cloud inked a deal with Red Hat to bring the distie’s open source solutions to its customers worldwide.

In short, $34 billion buys IBM a big presence and bargaining power in China, and with AWS, Google, and Microsoft within their own cloud platforms.

IBM signalled as much when it said that, under the deal, the two companies would “continue to build and enhance Red Hat partnerships, including those with major cloud providers, such as Amazon Web Services, Microsoft Azure, Google Cloud, Alibaba, and more, in addition to the IBM Cloud.”

Calling out the opposition in a press announcement does give the game away.

“IBM is committed to being an authentic multi-cloud provider, and we will prioritise the use of Red Hat technology across multiple clouds,” explained Arvind Krishna, senior VP, IBM Hybrid Cloud.

“In doing so, IBM will support open source technology wherever it runs, allowing it to scale significantly within commercial settings around the world.”

Red Hat will continue to be led by Jim Whitehurst and its current management team. Whitehurst will also join IBM’s senior team and report directly to Rometty. IBM said it intends to maintain Red Hat’s headquarters, facilities, brands, and practices.

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