On Sunday afternoon, October 28th 2018, IBM reported that it has reached a definitive agreement to buy all issued and outstanding common shares of Red Hat for $190.00 per share, which values the acquisition at roughly $34B. That will make it the 4th largest technology acquisition in history (trailing Dell buying EMC by an order of magnitude and close to the Qualcomm acquisition of NXP ($38B) and Avago's acquisition of Broadcom ($37B). It's the largest software only acquisition in software history.
- Most significant tech acquisition of 2018 will unlock true value of cloud for business
MyPOV – Agreed, easily so far the largest acquisition of the year.
- IBM and Red Hat to provide open approach to cloud, featuring unprecedented security and portability across multiple clouds
MyPOV – Can anyone spell Kubernetes? That's the main platform for portability and both vendors know it and have their respective offerings between IBM Cloud Private and Red Hat Cloud Platform supporting Kubernetes. Both vendors also have OpenStack assets, but that's a market segment that is not doing well for all parties involved (vendors and enterprises) from an original promise and potential perspective..
- Deal accelerates IBM's high-value business model, making IBM the #1 hybrid cloud provider in an emerging $1 trillion growth market
MyPOV – Certainly hybrid cloud is the next generation computing platform. But counting Linux related revenues is a stretch -so we need to look into more details (that IBM may not offer, at least has not offered them yet).
- Acquisition will be free cash flow and gross margin accreditive within 12 months, accelerate revenue growth and support a solid and growing dividend
MyPOV – Well, now we know why IBM has been unusually non-acquisitive for the last few years. It's a much larger acquisition, actually the largest IBM has ever made and good to see that it will be not only cash flow, but also gross margin accreditive (as an aspiration).
- IBM to maintain Red Hat's open source innovation legacy, scaling its vast technology portfolio and empowering its widespread developer community
MyPOV – This is key for IBM to even come close at recovering the acquisition price. Given IBM's positive track record with open source, this is a not an unrealistic outcome for IBM to achieve
- Red Hat to operate as a distinct unit within IBM's Hybrid Cloud team
MyPOV – Probably the most important immediate news fact. IBM will do good at not 'breaking' Red Hat, and starting as a separate unit is a good start. With Whitehurst reporting directly to Rometty, Red Hat will have a voice at the executive table. The challenge for Whitehurst will be to keep employees motivated, deliver on roadmap and try to keep negative "IBMization" effects away from Red Hat as much as possible. Keeping partners will be a key challenge in the first weeks.
Implications, Implications …
Let's look at the implications that this acquisition has for the different constituents of the cloud market:
Implications for IBM customersLikely no immediate impact for IBM customer and no immediate action items. IBM customers should start the conversation on what the largest acquisition in software history brings to them. What Red Hat assets and services can make IBM's cloud offerings better? Actively plan for a 'blue sky' session with your team on what it maybe worth to influence on, what to do first and what later. CxOs should find Red Hat know-how in house, and if not available, through their peers and their executive team's network, to establish potential benefits that are coming from the acquisition - always from their enterprises' perspective.
Implications for Red Hat customersWhile IBM is saying clearly that Red Hat will operate separately – as an IBM division, Red Hat customers need to make sure their enterprise can remain successful on Red Hat. As always with acquisitions the customers of the acquired party need to seek immediate re-assurance on important roadmap items, not only from Red Hat, but more importantly with IBM. Only when an acquirer knows where the porcelain is in the shelves, they can make a desired planned effort not to brake it. In the longer run, CxOs need to think of what benefits can be derived from the IBM ownership – think financial stability, reach, support and services. It's different to be the 3B or so small battleship, then dealing with the same battleship as part of a large fleet of vessels. Understand the course, investment plans and new roadmaps asap.
Implications for partnersFor software partners there is likely no immediate impact. For Red Hat services partners it will be key to seek reassurances that Red Hat will keep them around… the IBM consulting bench that can work in the Red Hat space is (with expected training) potentially 2-3 times larger than all the consultants in the RedHat ecosystem… For IBM service partners, consider the opportunity to add a Red Hat practice, before the joint offering brings in another services firm.
But the really tricky question is on the platform partner side. Red Hat has built a 'Switzerland' position vis a vis what are (or were?) IBM's competitors, starting with AWS (see here) as well as Microsoft (see here) and Google (see here). If these vendors assume IBM is making the right bets – they will look for repeating similar acquisitions (e.g. Suse, Canonical etc.). Once that happens, we will see a resurgence of on premise server OS war. Not to forget that hardware partners like Cisco, Dell, HPE, Intel and Lenovo now have to factor in that the new Red Hat is also selling hardware (Power). This will mean a lot of lunches, dinners and events for partner managers to chart the strategies for their respective enterprises, and CxOs need to pay attention to how this unfolds.
Implications for competitorsOn premise computing is seeing a resurgence, in short due to cloud skepticism, security, data residency and performance concerns. When even cloud 'native' vendors like AWS and Google are bolstering their on premises capabilities, then there is something going on. In fact, Constellation research shows that the next generation computing platform is a continuous computing platform that allows seamless workload portability for enterprises. It now comes back how much IBM competitors are willing to compete for the OS on-premises enterprise servers – or see IBM as the new 'Switzerland' of on premise OS. Key to watch for CxOs in the next months.
MyPOVJust when the short uptake at IBM in terms of revenue growth started to stall again, IBM pulls out the largest acquisition of the year, and the largest in software history. If IBM manages to handle this right, it will spark investor confidence in the vendor, and longer term gives IBM the opportunity to give the vendor what it set our 30+ years ago: Own the on-premises server operating system – remember OS/2? Sometimes history gives you another chance.
On the concern side, Red Hat's problem was that on-premises servers were shrinking. This is why the vendor made new bet, in the container platform and PaaS (with OpenShift). Some investments fizzled for a number of reasons that are not in Red Hat's control (like e.g. OpenStack). But Red Hat executives were very clear that they have understood the underlying shrink / growth mechanics: The new bets need to make up and do more than what Red Hat loose in on premise revenues. Not an easy feat. With IBM as an owner, Red Hat gets more scale and a huge sales force (and services bench). Maybe funds for more bets. But for now, IBM first needs to clarify what is right for customer in the not so few areas of overlap between what IBM offers and what Red Hat offers. That this isn't easy and does not have to go well – just look at the IBM CMS vs IBM's acquisition of SoftLayer.
But overall congrats to Rometty and her team, a bold move for hybrid cloud and maybe even for PaaS. If IBM manages to keep the partnerships in place and let potential AWS / Microsoft / Google ambitions on owning the on-premises OS ease – this can be a very good move. If IBM can ever make the $34B back – is something I doubt at the moment. But it's only a few hours – more coming in the next days- stay tuned.