IBM to acquire Red Hat

IBM to acquire Red Hat

IBM announced yesterday that it was going to acquire open source software company Red Hat for $34 billion, its biggest acquisition ever. This raises two interesting questions: Why is IBM acquiring Red Hat and how did an open source company become IBM’s biggest acquisition ever?

Red Hat describes itself as the leading provider of open source software and associated services for enterprise customers, strongly focused on infrastructure. In 2017, Red Hat reported USD 2.9 billion in revenue. It will now become a part of IBM’s Hybrid Cloud division. IBM says that the acquisition will allow it to expand its cloud computing offerings. Chairman, President and CEO Ginni Rometty says that “most companies today are only 20 percent along their cloud journey, renting [computer] power to cut costs. The next 80 percent is about unlocking real business value and driving growth.” For his part, Red Hat President and CEO Jim Whitehurst notes that IBM will allow his company to reach a far wider audience, and that IBM will preserve the company’s “unwavering commitment to open source innovation.”

IBM was one of the first to support Linux and Red Hat, and the two companies have a long-standing relationship. Recently, IBM was seemingly less involved in cloud open source communities like OpenStack, but with this acquisition they will be a strong driving force in cloud infrastructure. Apart from the cloud, as highlighted in the press release, IBM has another key reason for this acquisition: Red Hat is also the leading Linux distributor, with a very large and very enterprise client base. With a complete cloud infrastructure stack from OS to orchestration, IBM will once again reign in the infrastructure business

But the price of USD 34 bn, more than 14 times the 2017 revenues, may seem too high for an open source company, as clients are less locked to their providers due to the nature of open source. However, it is not that expensive for the undisputed open source infrastructure leader, whose clients include 90% of Global Fortune 500 companies, IBM’s prime targets. Moreover, Red Hat is the sole open source company that has been able to execute a profitable strategy, based on a sound business model. With global growth of 24%, according to PAC’s latest worldwide figures, the potential for Red Hat to continue delivering revenue and margin in the future is very real.

This acquisition will shake the market as many of IBM’s competitors currently partner with Red Hat, for RHEL, middleware, and cloud. It is too soon to evaluate this impact, but some contingency solutions will have to be found. At the same time, with this acquisition, IBM has embraced the open source roots of cloud computing, adding OpenShift (the leading enterprise container management platform) to its existing broad portfolio of cloud capabilities.