IBM Swoops on Red Hat in $34 Billion “Game Changing” Deal

In a week of quarterly earnings reports dominated among the cloud providers by talk of the importance of hybrid cloud, IBM just made its power play.

The company today announced that it had agreed to buy Red Hat, the world’s leading provider of open source cloud software, for $34 billion, or $190 per share.

The deal will make it the world’s number one hybrid cloud provider in what it described as a “emerging $1 trillion growth market”.

Hybrid cloud refers to a combination of closely orchestrated public and private cloud services along with the use of in-house data centers.

North Carolina-based Red Hat will be run as a unit of IBM but retain it current managers, its “independence, neutrality and go-to-market strategy”. The company’s customers include Adobe, CISCO and the British Army,

Red Hat’s solutions include tools that allow users to run Linux applications on IBM’s mainframes (still one of its strongest business lines) and allow it to powerfully bridge the gap between ongoing demand for such on-premises tools, with industry demand for efficient and elastic public cloud capabilities.

IBM said the deal will accelerate its revenue growth, gross margin and free cash flow within 12 months of closing.

IBM CEO: Deal is a “Game Changer”

“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” said Ginni Rometty, IBM Chairman, President and Chief Executive Officer.

She added: “IBM will become the world’s #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”

Research shows, as IBM noted in its release, that 80 percent of business workloads have yet to move to the cloud, held back by the proprietary nature of today’s cloud market. This prevents portability of data and applications across multiple clouds, data security in a multi-cloud environment and consistent cloud management.

The two said: “IBM and Red Hat will be strongly positioned to address this issue and accelerate hybrid multi-cloud adoption.”

“Together, they will help clients create cloud-native business applications faster, drive greater portability and security of data and applications across multiple public and private clouds, all with consistent cloud management. In doing so, they will draw on their shared leadership in key technologies, such as Linux, containers, Kubernetes, multi-cloud management, and cloud management and automation.”

Microsoft, Google Had Both Highlighted Hybrid Cloud this Week

Red Hat had only recently inked a major hybrid cloud partnership with Microsoft; agreeing in May to work together to link Red Hat’s OpenShift, its enterprise Kubernetes platform, with Azure, Microsoft’s public cloud.

The deal comes days after (as Computer Business Review reported) Google CEO Sundar Pichai said the company is “thoughtfully looking at” the potential for on-premises cloud solutions.

Microsoft’s Satya Nadella said the same week that: “We don’t think of hybrid as some stopgap as a move to the cloud. We think about it’s the coming together of distributed computing where the cloud and the edge work together…  [this is] shaping our future road map.”

IBM said in a release late Sunday that it will “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. At the same time, Red Hat will benefit from IBM’s hybrid cloud and enterprise IT scale in helping expand their open source technology portfolio to businesses globally.”

IBM Red Hat Deal: Committed to Being an “Authentic Multi-Cloud Provider”

“IBM is committed to being an authentic multi-cloud provider, and we will prioritize the use of Red Hat technology across multiple clouds” said Arvind Krishna, Senior Vice President, IBM Hybrid Cloud. He added: “In doing so, IBM will support open source technology wherever it runs, allowing it to scale significantly within commercial settings around the world.”

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

The IBM Red Hat deal has been approved by the boards of directors of both IBM and Red Hat. It is subject to Red Hat shareholder approval. It also is subject to regulatory approvals and other customary closing conditions. It is expected to close in the latter half of 2019. IBM will finance the transaction through a mix of cash and debt.

Analysts React

Forrester VP, Principal Analyst, Dave Bartoletti said: “The combined company has a leading Kubernetes and container based cloud-native development platform, and a much broader open source middleware and developer tools portfolio than either company separately. While any acquisition of this size will take time to play out, the combined company will be sure to reshape the open source and cloud platforms market for years to come.”

Angela Eager, Research Director at tech analyst firm TechMarketView, said: “With Red Hat close to $3 billion in annual revenue it has scope to add materially to IBM’s revenue stream directly and serve as a driver for services. Red Hat has seen growth slow somewhat over the current year, which is attributed in part to the shift to three year licences that tamped down revenue growth for the OS part of the business. Those licences are coming up for renewal which points to an interesting period ahead.”

She added: “While the Red Hat Enterprise Linux OS tends to be the first thing that comes to mind, it is the expanding clutch of products designed to build cloud-type platforms in the data centre and enable application management across multiple clouds that is more forward looking. These include OpenShift, which is based on Linux containers. The OS should not be overlooked though. Linux is a friend to heavy duty workloads (e.g. Big Data, AI/machine learning). More subtly, Linux and open source are associated with cloud native and emerging companies who are disrupting tech and business environments. As it continues to align its offerings with changing market demand, IBM stands to benefit from that type of association.”