IBM buys Redhat – a view from the peanut gallery !

Ok – few disclaimers first . I am an IBM executive and I hold some IBM stock. I had no involvement in this acquistion – I only found out when I saw it on social media yesterday afternoon. And I am not a company spokesperson – this is my personal blog and what I say below is just my own opinions.

Why do I think IBM made this decision ?

IBM strategy under Ginni has four focus areas – Cognitive/Data , Cloud , Industry, Security. Obviously they all overlap and are under different stages of maturity etc.

On the cloud front – IBM believes that hybrid cloud/ Multi cloud is the highest value segment . Most clients use several different cloud providers – and managing data and security and all other things an enterprise needs across all these clouds is a sweet spot for IBM , and Redhat plays very nicely into that theme . Vast majority – perhaps as high as 80 or 90 percent – of cloud related work for these clients is yet to happen and IBM sees that as a high value opportunity to partner with them. Not only does RHEL give a big advantage in IBM being common platform across clouds – it also comes with an 8 million strong developer community and a massive partner ecosystem.

Of course there is a lot of portfolio and channel rationalization effort that needs to happen in such a big acquisition.

IBM has made plenty of internal investments in smaller Acquistions and new businesses like Watson . At this point what IBM needs is a big bold step (some of my friends call it a Hail Mary) that can move the needle. I think buying Redhat will move the needle – not just as accretive revenue and margin , but also to strengthen IBM’s portfolio and let it capture significant hybrid cloud market .

What about clients ?

If this doesn’t sound like a good idea to IBM’s and Redhat’s clients – it’s game over . I don’t limit clients to paying customers – I involve all stakeholders in this including the folks using the free parts of Redhat backed projects like Fedora which I am personally a big fan of.

The onus is on IBM, Redhat and it’s partners to explain the next steps clearly to the clients. I only spoke with two clients since the news came out – and they were not at all spooked since they read that Redhat will stay as an independent BU. They also knew of IBM’s credentials on open source , including LINUX .

I think given the size of the ecosystem – effective communication is the primary risk of this deal . I don’t worry as much on engineering.

Largest software Acquistion – does IBM have that kind of money ?

A lot of friends asked me since the news came out whether IBM has this kind of cash. The question is genuine given the poor performance of the stock and the revenue misses for a few years. The truth is – IBM has always been good on free cash flow and balance sheet .

A lot of people only notice IBM’s P&L and stock price and forget the other financial health indicators .

Isn’t $34B way too pricey ?

Obviously one of the first questions to cross my mind too – and clearly shared by several observers. We asked the same questions when LinkedIn and GitHub got bought by Microsoft.

Redhat only makes about $3B in revenue with an operating income of $472M . It should be noted that both revenue and income have been growing year over year too, which is a good addition to existing IBM business . So yes it’s a big multiple indeed given it will take a long time on linear basis to recover that money. I am not making a comment on market cap given the news will typically send Redhat stocks up the stratosphere and make commentary meaningless .

I use three questions to think through whether this makes sense on strictly price perspective . Of course my answers are purely my own guesses – I don’t know what the big boys and gals considered , and could be biased.

1. Were there other companies that could have been bought for similar impact, but at cheaper price ?

IBM has historically stayed away from apps business – and that eliminates several companies I would have readily considered as great buys. So it seems to me that there wasn’t any other reasonably “big impact” Acquistions that could have worked better.

2. Could the money have been put to use to better effect other than buying ?

I am not opposed to share but backs at all – but that alone doesn’t count as a viable long term strategy. Investing in more data centers etc for cloud business is the area where it of course makes sense as an alternative . But would it have given the same revenue and profit uplift immediately ? Perhaps not .

3. Would existing business have been hurt if someone else bought this company ?

Amazon and Google are well aware of hybrid cloud as the reality and don’t hide that in their commentary anymore. But the two companies who potentially could have realistically benefited from buying Redhat would have been Microsoft and SAP . Probably too pricey for SAP to pull it off – which leaves Microsoft . They have been the strongest player in the high value part of the cloud market that IBM plays in. So from a defensive point of view as well – this passes the sniff test

Won’t IBM totally screw up Redhat’s open source goodness ?

Redhat is iconic in the open source world – and the only company of its kind to make the kind of big money it does, while staying true to their roots. When you hear IBM – the first thing that comes to mind is the history of big patent leadership over decades , and commercial licenses . So naturally the first question that comes up is whether IBM will destroy all that goodness.

The only logical first step here is to assure that Redhat will stay as an independent BU within IBM – and that’s exactly what IBM has announced formally. And Redhat CEO will report directly to Ginni even though the size of the business is less than what typically is held by people at that level. That is a VERY strong statement of how importantly Redhat will be treated within IBM . And I think Jim will be an excellent addition to our leadership team – which in itself is quite valuable.

For those who have been around longer – IBM did the Lotus Acquistion years ago which was the biggest in those days. Lotus was left alone a long time too as an independent team. Rational , Cognos etc are also software Acquistions that kept their identity for a long time – and many of those folks are still here .

While IBM is known as this patent giant and commercial first company – the truth is that IBM has been a huge proponent of open source too, and a big part of LINUX community from the beginning.

For near future – I don’t see Redhat DNA being diluted with any blue washing. For now IBM distribution , relationships, research and consulting are all good for Redhat to play even more strongly in the market . Long term – I fully expect integration between the two companies and hope it happens smoothly with minimum bumps in the road.

Product and Partner overlaps

The product leaders on both sides will have their work cut out for them . It’s not just the OS that comes with Redhat – there is jBPM , JBOSS etc that all have similar products on IBM side too . I have no knowledge of what the plans are , and am very curious to see how this evolves.

Channel organization will also have a full plate of actions to make sure that the vast and heterogeneous ecosystem gets clear plans and communication on next steps . The fact that Redhat will stay largely the same for near future should help a lot.

What about Redhat employees ?

Any time a small company gets bought by a significantly larger company, the employees of the smaller company will feel some angst . I expect that to be the case for Redhat colleagues too . The prevailing wisdom is usually that in the name of synergy – jobs will be cut and budgets will get slashed .

I don’t think – and I have no inside knowledge – there should be any such fear for near future given the announcement. IBM perhaps look scary from the outside but is a great place to work once you are here. And there are many of us – including moi – who are very keen to welcome you , help you settle in, work with you and learn from you !