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IBM Offers to Acquire Red Hat for $34B – Industry Snapshot

IBM Offers to Acquire Red Hat for $34B

On Sunday October 28,2018, IBM unexpectedly announced its intention to acquire Red Hat in a cash transaction (cash plus debt) valued at approximately $34B. The acquisition has been approved by both companies’ boards and is expected to close sometime in the second half of 2019 pending Red Hat shareholder and regulatory approval. According to the announcement press release, “Red Hat will operate as a distinct unit within IBM’s Hybrid Cloud team.”

Subsequent to the announcements, IBM hosted briefings for financial and industry analysts where executives from both companies positioned their combined strengths and outlined future objectives. Hybrid cloud was the center-piece for both discussions. Here are our key take-aways:

Enterprises have just begun their hybrid cloud journeys with only 20% of workloads in the cloud. This leaves the remaining 80% as a targeted opportunity for the combined entity, estimated by IBM to be worth $1Trillion.

The stated attractions for IBM were Red Hat’s long-standing championship of Linux and Open Source as well as key foundational technologies in hybrid cloud such as OpenShift for containers integrated with Kubernetes management.

As part of IBM’s cloud team, IBM will maintain Red Hat’s brand, got-to-market, partner strategies and facilities. Additionally, IBM will maintain Red Hat’s commitment to Open Source, its customers and partners, and in particular its employees.

Forthcoming product and services directions will include:

  • Enterprise-grade, open hybrid cloud
  • Pathways to migrate traditional workloads to the cloud
  • Consistent management across multiple clouds
  • Hybrid cloud security

IBM will integrate aspects of its product portfolio with the Red Hat “stack.” IBM’s Cloud Private and AI Open Scale solutions were mentioned in this context.

Evaluator Group Take

Evaluator has interviewed enterprise operational IT users with regard to using Open Source software in enterprise production IT environments. Typically, they were not opposed to using Open Source software but said that it needed to be backed by a solid vendor. This sentiment bodes well for Red Hat in IBM environments.

More problematic will be IBM’s future relationship with Red Hat customers, partners and employees who have embraced Red Hat’s open software solutions and business practices. Open Source is a way to develop technology without building-in proprietary limitations. But it is also a business proposition—a way to present and consume technology without proprietary limitations. IBM historically embraced open computing technologies. It played a significant role in making Linux an enterprise standard operating system. And it continues active participation in a number of Open Source communities. However, the Open Source movement was also founded on the hope of freeing computing from the hegemony of large, dominant vendors with proprietary business practices. Red Hat’s customers and business partners are equally cognizant of that aspect of Open  Source and will look to see if IBM will uphold what Red Hat has called the “Open Source way”—delivering products and services using an open and collaborative business model. More difficult to reverse will be the degree to which the field IBM sales force may have denigrated Open Source solutions in competitive situations.

Finally, we note that containers are favored for cloud-native application development and Red Hat is at the vanguard of the enterprise containerization movement with OpenShift (containers plus Kubernetes). Red Hat OpenShift is now the premier enterprise container platform and IBM owns it. However, OpenShift is deeply rooted in Open Source. Red Hat’s competitors and executives who may now be looking elsewhere could bring a solution like OpenShift to market while preserving the Red Hat-like, Open Source technological and business models.

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November 5, 2018


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