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IBM to Buy Red Hat for $34 Billion

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IBM to Buy Red Hat for $34 Billion

Tech giant IBM is buying out open source giant Red Hat to leverage its cloud assets and chart a hybrid cloud future. Let's look at the deal and its implications.

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Red Hat, everyone's favorite open source software giant, will soon be under new ownership.

IBM announced on Sunday that it will pay $34 billion to acquire Red Hat and its massive portfolio of OSS. The transaction still needs approval from regulators and shareholders (the latter of whom likely won't mind, as Red Hat's stock prices soared 50 percent after the news broke), but the deal is on pace to close in the second half of 2019.

Of course, the main concern with any such buyout — particularly of a company specializing in OSS — is whether there will be a shift to close off its software.

That doesn't seem to be the case, however, as Red Hat President and CEO Jim Whitehurst said in his own announcement, "When the transaction closes ... we will be a distinct unit within IBM and I will report directly to Ginni," referring to IBM CEO Ginni Rometty.

As with similar deals, such as Microsoft's purchase of GitHub and Salesforce's buying of MuleSoft, the long-term effects remain to be seen, but it looks like the Red Hat leadership is optimistic.

It's All About the Cloud

IBM didn't exactly hide its reasoning behind acquiring Red Hat, as seen at the very top of its website.

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Setting aside the marketingspeak of "this changes everything," the stated goal is to shoot for the top spot in the hybrid cloud space. Red Hat stands ready to help with that, particularly through its work on OpenShift and OpenStack, not to mention many of its cloud-adjacent technologies like Ansible.

Perhaps most interestingly, as more business-oriented publications have pointed out, it will allow IBM to shift from solely competing with the likes of Google, Microsoft, and Amazon to supplying technology to them — as Red Hat has partnerships with all of those tech giants.

Meanwhile, CloudBees CEO and co-founder Sacha Labourey pointed out in his own blog post about the buyout, "From the classic Red Hat Enterprise Linux (RHEL) and JBoss to the modern OpenShift (~Kubernetes) and Ansible, Red Hat owns key assets to provide enterprises a smooth ride from the current IT to the public cloud era. Public cloud vendors might operate the best destinations, but if there is no path to get there, it is not worth much. As such, Red Hat acts as a fantastic gateway to the public cloud."

So it looks like IBM is working two angles: make a huge push into the cloud and shift from direct competitor to supplier (while picking up an incredibly talented and specialized workforce along the way).

The Future

Now, whether IBM will be able to compete with the likes of AWS and Azure, at least in the public space, remains to be seen. After all, IBM has a cloud offering. That's why the focus on hybrid cloud will be so important — industries like fintech and medtech need that segmented cloud.

But while the focus so far has been how this will benefit IBM, let's not forget how Red Hat stands to benefit from this deal as well.

$34 billion is an unholy amount of money for Red Hat. This is a company with total assets (as of 2016) of roughly $4.16 billion, according to its financial statements. According to those same statements, its 2017 revenue was just shy of $3 billion and its net income this year has been $258.8 million.

In short, there are some very happy campers wearing red fedoras right now.

But let's step away from the money.

IBM, though historically not as strong a competitor in the cloud space as AWS, Azure, or GCP, is not some mom and pop shop. They've got operations and experience that scale beyond what most IT firms have ever dreamt of. Not only is Red Hat getting a huge amount of cash to invest in its own operations (and, apparently, the freedom to do so), they're going to get access to IBM's network and infrastructure.

And lastly, let's see where the money and tech combine. After all, this is the third-largest deal in the history of US tech. Only Dell's purchase of EMC in 2016 and the JDS Uniphase acquisition of optical-component supplier SDL in 2000 (the 90s were good times) were valued more highly.

But CloudBees's Labourey probably summed it up the best.

"My belief is that in the growing phase of such a market, the sales acquisition costs do not matter. For every $1 of business a vendor acquires today, the TCV (total contract value) associated to that $1 over the lifetime of that contract might be well beyond $1,000. In that phase, it is critical for vendors to seize the biggest market share today, at any cost," he said.

"As such, given IBM’s lag on the cloud market, spending $34B on Red Hat can make a lot of sense if IBM is able to leverage this asset to increase their cloud market share to become one of the top three cloud vendors," he said. "That’s the bet they did and this is the bet they had to do. In some ways, this is IBM’s last chance to matter on that market and if they don’t, they’ll slowly become a big but less relevant player. This is an 'all or nothing' bet. It is bold."

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Topics:
open source ,ibm ,red hat ,merger and acquisitions ,buyout ,hybrid cloud ,cloud

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