Open Season: IBM Buys Red Hat

Will Acquisition Bring IBM into the Open Source and Cloud Era?

Last Sunday, IBM announced that it’s acquiring open-source software company Red Hat for $33 billion. The transaction is IBM’s largest acquisition to date and one of the largest software acquisitions on record. The move builds on a long-standing partnership between the organizations that was expanded more deeply into hybrid cloud services in May 2018.

IBM has faced years of revenue declines as it has shifted away from legacy hardware business into offering more-modern IT services focused on the cloud. Its major recent initiatives have included developing business models in data and artificial intelligence with its Watson platform, in mobility with its Apple partnership, as well as new technologies such as Blockchain and quantum computing.

The acquisition of Red Hat is part of IBM chief executive officer Ginni Rometty’s efforts to improve her company’s capabilities in public, hybrid and multicloud or cloud brokerage solutions. It’s also a key stake in the ground, building out its open-source credentials especially in Linux and Kubernetes containers and having a consistent management experience in these environments. On a call for analysts, IBM highlighted the critical role of Kubernetes in its strategy for the coming years.

Founded in 1993, Red Hat specializes in the Linux operating system, developed as an alternative to proprietary platforms, mainly Microsoft’s Windows. While Linux is open source and available free of charge, Red Hat sells an enhanced version of the platform aimed at enterprise users and also provides, as a service, technical support. The collaborative spirit of open-source software is a central element to Red Hat’s success as well as to this deal because it eases customers’ ability to move their computing among various cloud providers and from their own data centres.

The deal is an effort by IBM to build out a common management platform to secure applications in public clouds including its own, as well as on-premises data centres and virtual machines. The company will be hoping that the acquisition will enable it to differentiate in hybrid cloud services and leapfrog the strategies of Amazon, Alphabet and Microsoft in the rapidly growing cloud business.

Of late, other technology companies have turned to acquisitions to gain scale, fend off competition and develop new business models, especially in cloud computing. For example, earlier in 2018, Microsoft bought open-source software platform Github for $7.5 billion, chipmaker Broadcom agreed to acquire software provider CA Technologies for nearly $19 billion, and Adobe purchased marketing software company Marketo for $5 billion. Even Dell, one of IBM’s main rivals, made a big bet on software and cloud computing two years ago, when it acquired data storage company EMC for $67 billion.

Many questions about the deal remain, especially concerning branding and portfolio overlap, but IBM says that for now, it plans to keep Red Hat neutral, operating it as a distinct unit and brand within its larger hybrid cloud team. We believe having Red Hat in its product portfolio is a step in allowing IBM to continue to reinvent itself and remain relevant to enterprises and corporate developers.

In the battle for public cloud supremacy, IBM has lost ground. But to its credit, with more than 100 years under its belt, it knows perhaps more than most that reinvention requires bold moves. It remains to be seen if the hefty price was worth it.