IBM Buys Red Hat

  • October 28, 2018
  • Scott
  • 0 Comments

[Update: more analysis has hit the wire over the last few days, a few comments on that below the fold]

I have to admit, I didn’t see this coming: IBM to acquire Red Hat in deal valued at $34 billion.

And I jotted my initial impressions down in a thread on Twitter in this thread:

It’s the largest deal IBM has ever done, and it is a nice premium to Red Hat’s previous $20B market cap.

I can see some of the logic here: IBM has had success with open source-led strategies before. Open source software has been at the core of a number of IBM initiatives over the years, starting with their Unix/Linux support strategy years ago, and including more recently BlueMix.

But this is obviously taking the open source strategy to the next level.  We’re fortunate to be partners with IBM and fans of Red Hat software, so this is exciting news for our team:

Red Hat started 25 years ago as a distributor of a particular flavor of Linux, an open-source operating system that is commonly used in server computers that power company data centers. Today, Red Hat is known for distributing and supporting Red Hat Enterprise Linux, as well as other technologies commonly used in data centers. The company, which went public at the peak of the dot-com boom in 1999, earned $259 million on revenue of $2.92 billion in its last fiscal year, which ended Feb. 28. Its revenue grew 21% between the 2017 and 2018 fiscal years.

As CNBC rightly points out, this has been quite a year for open source transactions, with Microsoft buying GitHub, and Salesforce acquiring Mulesoft, though I don’t imagine that those deals directly impacted deal logic here.

Now the trick will be to reconcile vast software catalogs – and try to reap the best of both worlds.  This deal puts IBM on a path to grow, albeit at significant cost.  And there’s much about Red Hat’s business model that IBM can benefit from.  Likewise, I expect IBM can bring Red Hat into even more enterprises.

Focusing in on a corner of their software catalogs that we’re quite familiar with:  IBM has great product offerings for process engines and rules engines.  And it turns out that Red Hat has credible open source solutions for process engines and rules engines.  I suspect IBM will craft commercial solutions around these open source variants – not unlike Red Hat itself has done.

Well, we live in interesting times!

Update:

Redhat’s quote on their own site:

“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 – all while preserving our unique culture and unwavering commitment to open source innovation.” – Jim Whitehurst, President and CEO, Red Hat

And how does that hold up?  Let’s look to two interesting bits of analysis from two different authors. First, Sacha Labourey discusses his prediction that Red Hat would sell to Google, er, IBM this year.  Sacha sees great reasons for Red Hat to be acquired, inherently:

  • Great assets for the cloud
  • Access to CIOs thanks to RHEL, OpenShift, and Ansible.
  • Developer love – lots of developers (bottom up) love Red Hat products.

As a weakness, Red Hat’s “pure” open source model – harder to defend in a world where those open source assets can be leveraged by others, who have better scale in the cloud (AWS, Azure, Google). Sacha argues that the acquisition costs of customers – right now – into your cloud offering is irrelevant, because the future value is so great (and the future pain of not having that client is so great).

Second, there’s Ben Thompson’s take on Stratechery: where he starts with a story from the founder of Red Hat, Bob Young, explaining how IBM’s own Lou Gerstner inspired a key insight about their own business: that Red Hat was in the service business, not the product business.

Ben takes us on a tour of IBM history from Gerstner to present, how Gerstner attempted to revitalize the company, and how the landscape has changed and left IBM with a tougher row to hoe lately.  Ben posits that the cash-generating subscription business is good, but that:  “the real prize is Openshift, a software sweet for building and managing Kubernetes containers.”  Openshift/Kubernetes will run on any cloud provider.

Another article from redmonk is a fantastic (and longer) read on the subject, and this passage is what caught my attention:

In 2001, IBM committed to spending a billion dollars on Linux. Interestingly, however, this did not include selling the operating system itself, but rather making it better, making it more credible and making it more visible. IBM was content instead to leave the potential operating system revenue on the table for the likes of Red Hat and SuSE. This was because the company had determined that the real commercial opportunity wasn’t in the baseline platform, but rather up the stack in the layer of abstraction that sat on top of the operating system. This software came to be called middleware, and IBM’s offering in the space WebSphere generated an enormous amount of revenue for the company’s software business […]

In OpenShift, IBM has a similar opportunity. Just as applications once upon a time were written to Java application servers in part because of the promise of portability, so to are they now being written to various cloud native platforms – OpenShift included – to avoid being explicitly tied to a given platform. Twenty years ago the vendor names were Dell, HP and IBM; today it’s Amazon, Google and Microsoft. The principle, however, is the same: vendors who can offer an enterprise the promise of independence have something of value to offer.”

I think that’s the best take on IBM’s best path to success with this acquisition, and as a partner of IBM’s that has done well within the Websphere ecosystem, it paints a picture of how we need to think about this next wave of Kubernetes/OpenShift – which we are already knee deep in!

Finally, there’s a good discussion, with opinions as well from yours truly, on this BPM forum discussion: “What’s your take on IBM Buying Redhat…”

 

 

 

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