IBM Closes $34B Red Hat Acquisition

Following the official closing of IBM’s $34 billion acquisition of Red Hat today, leaders from both companies reiterated Red Hat will continue to operate independently of IBM but will leverage IBM resources to advance the hybrid cloud computing ambitions of the newly combined entity.

Arvind Krishna, senior vice president for cloud and cognitive software at IBM, said IBM and Red Hat together will be in a better position to address what he described as Chapter Two of a continuing cloud journey. With 80% of applications still running in on-premises IT environments some 10 years after the arrival of public clouds, it’s apparent hybrid cloud computing will become the dominant form of IT, he said.

Red Hat will play a critical role in helping customers achieve that goal using a common operating model based on distributions of Linux and Kubernetes container orchestration software, Krishna said. However, he added, IBM sees no need to rationalize its current middleware software portfolio, which often addresses use cases that Red Hat doesn’t.

Paul Cormier, executive vice president and president for products and technologies for Red Hat, said Red Hat will continue to invest in products and projects independently of IBM. As such, Red Hat does not expect its relationship with its partners that compete directly with IBM to change substantially, he said. At the same time, he stressed that working more closely with IBM will accelerate a 100% open source approach to hybrid cloud computing that otherwise would have taken Red Hat “many years” to execute on its own. That hybrid cloud computing strategy, in contrast to rivals, will span virtual machines, bare-metal servers and public clouds, Cormier said.

Other than introducing Red Hat to a potentially larger customer base, it’s not quite clear how being a unit of IBM accelerates the Red Hat strategy. Red Hat and IBM sales teams, for example, will have no incentives to cross-sell offerings and Red Hat will continue to promote its brand independently of IBM, in much the same way VMware operates independently of the rest of Dell Technologies. Both Red Hat and IBM also stressed there is no plan to impose an IBM culture on Red Hat or lay off any personnel. There is a consensus that open source software will play a role in enabling hybrid cloud computing that should generate opportunities for IBM to generate more professional services revenue.

Longer-term, there’s clearly an opportunity for both Red Hat and IBM to promote the adoption of a common set of best DevOps practices across a hybrid cloud computing environment. Many organizations, however, are already moving to extend those best practices across all the platforms that make up very diverse IT environments.

For now at least, organizations that have already committed to Red Hat appear to be lending their continued support. Red Hat’s fiscal year 2019 revenue was $3.4 billion, up 15% year over year. Fiscal first-quarter 2020 revenue was $934 million, up 15% year over year. Services revenue for Red Hat also grew 17%. Precisely how IBM and Red Hat intend to unlock the value of this merger beyond the momentum Red Hat already enjoys, however, remains a bit of a mystery.

— Mike Vizard