IBM Acquisition of Red Hat Will Trigger Tectonic Changes in The IT Landscape

Every once in a while comes along an acquisition with the potential of drastically changing the business landscape. One such acquisition was made over the weekend by IBM. IBM is acquiring Red Hat for $34 billion, a 64% premium over Red Hat's (RHT) closing price on Friday. This event is significant in several different ways, not to mention that this is the largest software only acquisition to date.

There have been several different takes on the rationale behind Big Blue buying Red Hat. Like any tech acquisition this size, there is a business or strategic aspect as well as a technological impact of this deal. Let's take a look at both.

Acquiring Red Hat immediately gives IBM access to RHT's 100,000 enterprise customers that are in various stages of adopting cloud. Now, IBM can tap into this customer base to sell its "hybrid cloud" services. It appears that IBM was forced to make this bold move because of its lack of meaningful product portfolio driven by years of cost cuts. On the revenue front, this deal would add about 4% ($3B) to IBM's revenue and about 6% to IBM's free cash flow, hardly justifying the premium paid (~63%). The biggest concern is how will this news affect Red Hat's existing business as it is no longer a neutral entity.

On the technology front, let's look at the areas that will be impacted:

Open Source 

Red Hat is arguably the most successful open source company to date. Over the years, IBM has made significant investments into open source — Linux, OpenStack, Cloud Foundry etc., but has never been truly recognized as a champion of open source. Now, with Red Hat becoming part of IBM, it will be interesting to see which culture and philosophy will prevail with regards to open source.

Cloud

Despite acquiring several cloud companies since it bought SoftLayer in 2013, IBM continues to lag behind major cloud providers Amazon, Microsoft, and Google. Red Hat can accelerate IBM's ability to help enterprise clients transition to a multi-cloud/hybrid IT environment, given Red Hat's leading position in the Linux operating system and solid position in middleware. This move by IBM also indicates that it is betting big on multi-cloud/hybrid cloud, which is increasingly being acknowledged by major cloud providers. IBM now has significant penetration in the enterprise but the question is whether enterprises will trust IBM/Red Hat to help them with their cloud strategy. It will also be interesting to see how the competitors respond.

Containers and Kubernetes

Containers and Kubernetes are two of the hottest emerging technologies that promise to change how IT delivers applications. Red Hat recently acquired CoreOS to strengthen is container-based offerings including its container platform OpenShift. In recent weeks, IBM has announced a few container related products including the multi-cloud manager . In the short term, there is likely to be some confusion around which products will survive and which ones won't resulting in some customers staying away from IBM/RHT offerings. Also, enterprises interested in using technologies such as Kubernetes to remain cloud agnostic will stay away from IBM/Red Hat products to avoid vendor lock-in.

Overall, this acquisition is likely to have a significant impact on three of the hottest trends in enterprise software. As with any major acquisition, the biggest challenge will be in the integration of the two entities. Integration could take up to a year during which the leadership team and the employees are likely to be too distracted to focus on the business, allowing competition to make inroads and capture market share. Making this acquisition successful will require flawless execution by both the parties involved. But with IBM's miserable track record of assimilating acquired companies, the odds of success are quite low.