On Sunday afternoon, October 28, IBM announced a deal to acquire Red Hat, the world’s leading provider of open source cloud software, for a massive $34 billion. The deal came out to $190 per share in cash. This is one of the largest acquisitions in technology — for reference, Microsoft acquired GitHub in June for $7.5 billion.
Together, the companies hope to lead the way in hybrid cloud computing. Linux is the preferred operating system for cloud computing, and is a specialty of Red Hat.
Cloud computing is an emerging $1 trillion growth market, and IBM says 80% of business workloads have yet to move to the cloud — i.e., lots of value to still be unlocked.
The major third-party cloud platforms currently are Amazon, Microsoft, and Google. Together, Red Hat and IBM could stand a chance to position themselves against those three, particularly by offering a hybrid cloud alternative.
Here, we take a look at key points of this acquisition and what implications it will have on the martech industry.
Key features of the deal:
- $190 per share in cash, more than 60% Red Hat’s closing price on Friday of $116.68 a share
- Expected to close in the second half of 2019
- Red Hat to operate as a distinct unit within IBM’s Hybrid Cloud team, maintaining Red Hat’s headquarters, brands, and practices
- Red Hat CEO Jim Whitehurst will report directly to IBM CEO Ginni Rometty
- High closing price suggests possibility of other bidders alongside IBM
- IBM and Red Hat had already partnered for more than 20 years. IBM was an early supporter of Linux, and worked with Red Hat to develop and grow enterprise-grade Linux for customers.
- Founded in 1993, Red Hat had $2.4 billion in revenue last year. Their headquarters are in Raleigh, NC.
Traditional cloud computing:
- In the cloud model, developers write code that runs on remote data centers, instead of on in-house hardware or software — giving advantages of lower costs and faster deployment
- Currently, the major third-party cloud platforms are Amazon, Microsoft and Google
- Some companies, however, don’t want to get locked into relying on third-party technology (particularly from one of those three giants). There’s also the issue of difficulty in moving between clouds.
Hybrid cloud computing:
- In a hybrid cloud model, some crucial data and apps run on private cloud technology inside a company’s own data centers, while other tasks run on third-party public cloud offerings.
- Together, IBM and Red Hat plan to offer the technology to link a company’s in-house cloud with multiple third-party clouds. Their solution will make it easier to manage and secure private clouds as well as links to multiple public clouds.
Benefits for IBM:
- IBM is a 107-year-old company. Much of its historic power in hardware, software, and services has been waning against younger technology companies such as Microsoft, Google, and Amazon.
- IBM will set itself apart from current dominant players via Red Hat’s open source innovation legacy.
- Widens network of software developers
Benefits for Red Hat:
- Stays true to their commitment to open source innovation — but now with the support and scale of one of the biggest enterprise technology companies in the world
- Can more easily move further into enterprise through IBM’s existing business and reputation
- On their own, they would have been too small to compete with Amazon, Google, and Microsoft — but at the same time, they had been considered too big for an easy acquisition.
What it means for martech:
- This is one of the biggest acquisitions in technology — remember that the big news of Adobe-Marketo was less than $5 billion. This is $34 billion.
- As Google, Amazon, and Microsoft continue to assert their dominance, even IBM knows it needs to make a big play to hope to compete.
- IBM’s choice is particularly interesting and strategic given Red Hat’s open-source legacy. Perhaps they’re banking on consumers becoming ever more mindful of data privacy and ever more suspicious of leaving so much information power in the hands of so few technology giants.
- If only 20% of business workloads are currently in the cloud, we stand to see lots of innovation in this area.
What people are saying:
- This as the “most significant tech acquisition of 2018” and “will unlock the true value of cloud for business.”
- “The acquisition of Red Hat is a game-changer. It changes everything about the cloud market. IBM will become the world’s #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.” — Ginni Rometty, IBM Chairman, President and Chief Executive Officer
- “IBM’s commitment to keeping the things that have made Red Hat successful – always thinking about the customer and the open source community first – make this a tremendous opportunity for not only Red Hat but also open source more broadly. Since the day we decided to bring open source to the enterprise, our mission has remained unchanged. And now, one of the biggest enterprise technology companies on the planet has agreed to partner with us to scale and accelerate our efforts, bringing open source innovation to an even greater swath of the enterprise.” — Paul Cormier, President, Products and Technologies, Red Hat
- “IBM just made the cloud-computing war far more interesting.”
- “On their own, IBM and Red Hat were destined to be perpetual laggards in the computing industry. IBM has been too tethered to its past to chart the future of technology. Red Hat was too small to compete with titans. But together, with this $33 billion deal, the duo may be able to plot a new course.”
- “Strategically, rolling the dice might be Rometty’s best play. On its own, IBM is destined to shrink in both revenue and technology relevance, despite the steady stream of company-generated hogwash about how much it is transforming into a technology leader. It is not.”
- “With the deal for Red Hat, IBM is trying to position itself as a kind of corporate “Switzerland” in cloud computing — a trusted partner of businesses that are moving to the cloud, but are leery of becoming dependent on one major cloud supplier.”