The IBM and Red Hat mega-merger: Who stands to benefit most?

‘Switzerland’ stance

According to Cormier, these partnerships will be unaffected by IBM’s ownership because Red Hat intends to retain its neutrality and “Switzerland” stance with how it works with partners across the technology industry.

“We are going to continue to prioritise what we do for our partners on a business case basis, and do the right thing for our clients,” he said.

It is these same hybrid cloud capabilities that IBM, in its acquisition announcement, cited as a major factor in its decision to acquire Red Hat, claiming the move means it will go on to become the world’s number one hybrid cloud provider once the deal closes.

The general consensus within the technology industry is that enterprise IT buyers increasingly favour the use of the hybrid cloud consumption model, because it enables them to marry up their existing on-premise assets with public cloud resource.

For many enterprises, there will be applications and workloads – for regulatory, ease of use and customisation reasons – that will have to remain on-premise for a long time to come, whereas other parts of their IT estate can be moved to the public cloud with relative ease.

It is a market in which all of the major public cloud providers are vying for dominance, and many of them are leaning on Red Hat for support in getting there. Which is why there is a degree of scepticism among IT market-watchers about how much free rein IBM will really allow its new charge once the deal closes.

“Red Hat are very neutral, but I can’t see IBM backing off [completely] because it’s not their culture,” said Philip Dawson, vice-president of research at Gartner. “They will want their blue technology stack to be dominant, and Red Hat is now part of that stack.”

From a “meddling” perspective, there are also other technology areas where IBM and Red Hat compete with each other, as there is some degree of overlap between the two firms’ software-defined storage propositions, and their hybrid cloud management software offerings too.

In these situations, IBM will need to decide whether its happy competing with itself, or would prefer to prioritise its own offering over what Red Hat has, said Dawson.

Stronghold on independence

And these are not uncharted waters for the enterprise technology industry, said Dawson – virtualisation giant VMware is in a similar situation with its parent company Dell-EMC, which has retained a stronghold on its independence since the parties merged in 2015.

“VMware has kept its autonomy very well, but occasionally it does tend to get a bit close and awkward [from a competitive standpoint], and I do think you will see that with IBM, with IBM flexing its muscles more with Red Hat than Dell does with VMware,” said Dawson.

“Keeping Red Hat separate is going to be a real challenge when [IBM] is trying to progress its cloud business. It really is.”

In terms of who stands to gain the most from the acquisition, the stock market response seems to suggest it will be Red Hat, as its share price rose by 45% to $169.63, while IBM’s fell by just over 4% to $119.64, after the acquisition news.

As Red Hat CEO Jim Whitehurst put it in the IBM acquisition statement, with IBM’s money behind it, Red Hat stands to benefit from more resources that should enable it to operate an even greater scale than it does now, while increasing the addressable market for its technologies.

For IBM, the stakes of the deal are markedly higher, as Monday’s share price drop comes hot on the heels of another fall in its stock price, brought about by its most recent financial results, which saw revenue drop by 2.1% to $18.8bn for the third quarter.   

Although IBM’s cloud revenue for the quarter was up 10% and hit $4.5bn, this growth rate was markedly down on the previous quarter, when the company reported a 20% uptick in cloud sales. In response to the results, IBM’s share price suffered its biggest drop in four years.

As this shows, cloud revenue is a key performance metric for IBM, and has been since the firm went public with its “strategic imperatives” push in January 2017. That work has seen it champion several technology areas it considers to be potential sources of new growth for the company as it works to offset the downturn in enterprise demand for its legacy, on-premise technologies.

Key to this is broadening out its hybrid cloud strategy by drawing on Red Hat’s capabilities to help accelerate cloud change within enterprises, with IBM claiming that, at present, most firms are only about 20% done with moving to the cloud.

“The next 80% is about unlocking real business value and driving growth,” said IBM CEO, chairman and president Ginni Rometty in a statement to the press about the acquisition. “This is the next chapter of cloud.

“It requires shifting business applications to hybrid cloud, extracting more data and optimising every part of the business, from supply chains to sales.”

At the moment, IBM says this is proving difficult for enterprises to do because of the challenges they face in trying to migrate applications between providers that make up the “proprietary” cloud market.

But IBM is not the only cloud service provider eyeing up that 80% figure, nor is it alone in acknowledging the important role that open source technologies will play in helping enterprises move more of their on-premise workloads and applications to the cloud.

Microsoft, for example, has emerged as a vocal supporter of the open source community in recent years, with the debut release of a Linux-friendly version of its SQL Server software, its acquisition of GitHub and its financial backing of the Open Source Initiative (OSI).

‘A cloud for everyone’

Google, with its mission statement to “build a cloud for everyone”, is an active contributor and supporter of the open source community, and created the widely used Kubernetes container technology, before handing it over to the Cloud Native Computing Foundation to maintain.

As Google Cloud CTO and ex-Red Hatter Brian Stevens told Computer Weekly recently, an open cloud is better for users. “It gives them flexibility and choice and makes it easier for them to exit,” he said.

Against this backdrop, the Red Hat acquisition makes sense, and puts IBM in a better position to tap into a number of sub-trends playing out within the wider cloud computing market, according to William Fellows, founder and research vice-president of IT analyst house 451 Research.

“It is unclear whether IBM has secured a future with this acquisition – or can remain relevant more generally,” he said. “It still looks behind the curve.

“However, it has bought into where the puck is heading – Kubernetes (as Red Hat’s OpenSoft is a very enterprise-credible Kubernetes distribution) microservices, cloud native as well as hybrid cloud.”

And while IBM is correct in its decision to double-down on its efforts to court enterprises with its hybrid and multi-cloud offerings, Fellows is unsure about the reception it will get from CIOs and IT directors.

“The multi-cloud/hybrid IT message is a strong one, although how credible IBM is perceived to be remains to be seen,” he said. “While IBM Cloud remains the number three cloud IaaS player [behind Microsoft and AWS] by size, it hasn’t exactly been the success IBM had hoped for.

“IBM’s actions would usually have resulted in disruption to competitors. That was in the past. Now competitors won’t be worried and are likely to be able to take advantage of the fear, uncertainty and doubt [generated by this acquisition].”

IBM’s market share

This is a view largely shared by fellow market watcher John Dinsdale, chief analyst at Synergy Research Group, whose latest worldwide cloud market tracker flagged a dampening in recent quarters in terms of how big a share of the market IBM is accruing, compared with its competitors.

“The acquisition won’t have an immediate impact on IBM’s market share in IaaS, PaaS or hosted private cloud services,” said Dinsdale. “What the acquisition will do is give IBM a big assist in how it addresses complex enterprise requirements for hybrid cloud deployment and management.”

Adding Red Hat to its product mix should also give IBM something of a leg-up in generating revenue from professional services, as that is predominantly where Red Hat makes most of its money, too.

“In terms of revenue and market share, the payoff to IBM will come mainly in software and professional services,” added Dinsdale. “There will be some ancillary benefits, though, as this will help IBM to raise its game in private cloud infrastructure and hosted private cloud services.”

There is still a long way to go, and regulatory approval to secure, before the IBM-Red Hat mega-merger is a done deal, with both parties claiming the deal may not close until the second half of 2019.

With AWS and Microsoft, in particular, currently setting the pace of growth for the rest of the cloud market, by the time the deal does close, IBM could have even more ground to make up if it intends to usurp either of its rivals and make its hybrid cloud ambitions a reality.