IBM Buying Red Hat for $34B, Turning Cloud Upside Down

IBM rocket-boosts its flagging cloud business by acquiring the open source pioneer.

Mitch Wagner, Executive Editor, Light Reading

October 28, 2018

9 Min Read
IBM Buying Red Hat for $34B, Turning Cloud Upside Down

IBM, which has been struggling recently to keep up with its cloud competitors, just gave itself a rocket boost with the $34 billion acquisition of Red Hat Software, which was announced Sunday.

With the deal, IBM Corp. (NYSE: IBM) carves out a place for itself that's separate from the top cloud providers. Or, we should now say, other top cloud providers. Whereas Amazon, Microsoft and Google are primarily public cloud and software providers, IBM specializes in hybrid cloud, offering a deep hardware and software stack stretching back through literally 60 years of enterprise legacy, and looking ahead to the containerized and AI-enabled future.

Red Hat Inc. (NYSE: RHT) will operate as a "distinct unit" within IBM's Hybrid Cloud business, with 20-year veteran Red Hat CEO Jim Whitehurst staying on and reporting directly to IBM CEO Ginni Rometty, the two companies said in a statement Sunday. IBM will pay $190 per share in cash for Red Hat. (See IBM To Acquire Red Hat for $34B.)

Although it has been growing, IBM's cloud business has not been keeping up with the overall market. Its revenues were up 20% over the last 12 months, to $19 billion, according to quarterly earnings announced this month. (See IBM Is Losing the Cloud Race.)

But, during the quarter, overall cloud spending shot up an estimated 45% year-over-year, according to a report from Synergy Research. Synergy ranked IBM as third among top cloud providers, far behind Amazon -- which, as the number one provider, outsizes the next four competitors combined -- and also behind Microsoft. IBM lost market share slightly in that quarter, down 1%, while Google gained by 1%.(See Cloud Spending Growth Slows, While Big Providers Squeeze Little Guys Even Harder.)

Figure 1: Red Hat CEO Jim Whitehurst, pictured here in May, will stay on as head of the independent Red Hat business unit, reporting directly to CEO Ginni Rometty. But will he be allowed to continue wearing the shoes? Red Hat CEO Jim Whitehurst, pictured here in May, will stay on as head of the independent Red Hat business unit, reporting directly to CEO Ginni Rometty. But will he be allowed to continue wearing the shoes?

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"The acquisition is by far IBM's largest deal ever, and the third-biggest in the history of U.S. tech," according to CNBC. Larger deals include the $67 billion merger between Dell and EMC in 2016 and JDS Uniphase's $41 billion acquisition of optical-component supplier SDL in 2000. (See Dell Buys EMC for $67B in Biggest Tech Deal Ever and JDSU's Acquisition Hangover.)

Also: Rometty told CNBC that the deal should not be interpreted as part of any plan for her to transition out of her position as CEO at IBM.

"I'm still young and I'm not going anywhere," the 61-year-old Rometty told CNBC. (See IBM CEO Ginni Rometty: Darn Agile for a 106-Year-Old and IBM's Rometty: 'You Have to Get Comfortable With Being Uncomfortable'.)

Heavy Reading analyst James Crawshaw said IBM paid a "hefty premium to stock market value" -- 63% -- and noted that Red Hat is "a huge acquisition for any company, let alone IBM," whose next-largest acquisition was Cognos, in 2007 for $5 billion -- a fraction of the $34 billion IBM is paying for Red Hat.

"I would imagine IBM's shares will dip a little tomorrow as investors think they have overpaid and will mismanage the acquisition with corporate cultures not gelling," Crawshaw said Sunday.

Red Hat reported year-end revenue of $2.9 billion, up 21% year-over-year, in March. (See OpenStack & NFV Help Drive Red Hat Growth.)

On the other hand, the acquisition should be a positive for Canonical Ltd. , which will "now be seen as a true independent," Crawsaw said.

It's been a busy time for open source acquisitions. Microsoft closed its $7.5 billion GitHub acquisition Friday. And earlier this month, big data rivals Cloudera and Hortonworks agreed to merge in a $5.2 billion deal. (See Microsoft Completes $7.5B GitHub Acquisition and Behind the Cloudera-Hortonworks Merger: 'The Enemy of My Enemy Is My Friend'.)

Twitter buzzed over the deal Sunday.

Dan Sneddon, a Red Hat distributed system and network architect and senior principal engineer, was stunned: "I'm having trouble picking my jaw up off the floor. This probably won't be a bad thing in the long run, but calling this a surprise is an understatement."

Jeff Garzik, blockchain entrepreneur and Red Hat veteran, said: "As with $MSFT @Microsoft buying @github, we see the older tech giants trying to reinvent themselves, as legacy business models expire... and making billion-dollar bets on #opensource."

He also said IBM has been "directionless and trend-chasing. Always the 2nd mover on any innovation, rather than a leader. Famously legacy sales structures often lead to different IBM biz units competing against each other for the same customer. Will this reinvigorate IBM?"

"IBM makes a big move to attract software developers and position itself as the 'Switzerland' of the cloud world," New York Times technology and economics reporter Steve Lohr said on Twitter.

"The only upside I can see to an IBM/RHAT deal is if IBM lets Red Hat run it like a reverse takeover. Otherwise it's going to be 'How many Global Services consultants do you want with that OpenShift install?'" tech journalist Simon Le Gros Bisson tweeted.

Next page: Don't chat up Ginni Rometty in the bathroom

Also, this:

Early days for cloud
"Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs," Rometty said in a statement. "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 optimizing every part of the business, from supply chains to sales."

Red Hat's Whitehurst said, "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."

IBM and Red Hat share strategic focus in Linux, containers, Kubernetes, multicloud management and cloud management and automation, the companies said. The companies have partnered for 20 years, with IBM supporting Linux early on and their partnership helping drive IBM's $19 billion hybrid cloud business.

The two companies expanded that partnership in May, with tools to allow users to build applications spanning IBM Cloud Private and Red Hat OpenShift. (See Red Hat Partners With Microsoft & IBM for Hybrid Cloud Power.)

Until now, IBM competed as well as partnered with Red Hat, with its Cloud Private platform going up against OpenShift. Cloud Private is a centerpiece of IBM's hybrid cloud strategy; it's a software stack based on Kubernetes, with operational, telemetry and management utilities, as well as containerized MQ messaging, open source DevOps tools and IBM's own WebSphere and Watson AI Tools. The software is designed to give developers everything they need to get up and running on cloud applications. It runs on bare metal, virtual machines, OpenStack, the IBM Z Series mainframes, Power Systems and public cloud infrastructures. (See IBM: We're Beating Red Hat Private Cloud Growth.)

OpenShift is Red Hat's cloud platform for running Kubernetes containerized applications on both public and private cloud. Red Hat acquired CoreOS in January for $250 million to enhance Red Hat's toolset for day-to-day Kubernetes application operations. (See Red Hat Beefs Up OpenShift Automation, Based on CoreOS Acquisition and {740164}.)

"IBM and Red Hat also 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," the companies said.

"Upon closing of the acquisition, Red Hat will join IBM's Hybrid Cloud team as a distinct unit, preserving the independence and neutrality of Red Hat's open source development heritage and commitment, current product portfolio and go-to-market strategy, and unique development culture," the companies said. "IBM intends to maintain Red Hat's headquarters, facilities, brands and practices."

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About the Author(s)

Mitch Wagner

Executive Editor, Light Reading

San Diego-based Mitch Wagner is many things. As well as being "our guy" on the West Coast (of the US, not Scotland, or anywhere else with indifferent meteorological conditions), he's a husband (to his wife), dissatisfied Democrat, American (so he could be President some day), nonobservant Jew, and science fiction fan. Not necessarily in that order.

He's also one half of a special duo, along with Minnie, who is the co-habitor of the West Coast Bureau and Light Reading's primary chewer of sticks, though she is not the only one on the team who regularly munches on bark.

Wagner, whose previous positions include Editor-in-Chief at Internet Evolution and Executive Editor at InformationWeek, will be responsible for tracking and reporting on developments in Silicon Valley and other US West Coast hotspots of communications technology innovation.

Beats: Software-defined networking (SDN), network functions virtualization (NFV), IP networking, and colored foods (such as 'green rice').

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