"Game Changing" Move by IBM the Largest Software Company Acquisition in Corporate History
IBM announced this weekend that it will acquire the shares of Red Hat (NASDAQ: RHT) at a $190, a 62.8% premium to their closing price of $116.68 in a $34 billion USD deal still subject to approval by regulators & stockholders. If closed successfully, the deal will represent the largest purchase price paid for a software company in history, topping the 2016 acquisition of LinkedIn by Microsoft for $26 billion USD. In initial comments on the merger, IBM CEO Ginni Rometty stated: “The acquisition of Red Hat is a game-changer. It changes everything about the cloud market. IBM will become the world’s #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.” Founded in 1994, Red Hat is one of the oldest and most widely used Linux distributions available for data centers today. Red Hat was the first open source software company to $500 million USD in annual revenue and is expected to surpass $3 billion in revenue in 2018. IBM gains the Red Hat Enterprise Linux codebase, programming talent, patents/IP, & goodwill, as well as the OpenShift, Kubernetes, OpenStack, JBoss, CoreOS, & Ansible resources. Red Hat has over 12,600 employees with corporate headquarters in Raleigh, North Carolina. As IBM is projecting cloud scale-out at the global level as a $1 trillion USD annual market, Red Hat's programming & engineering talent is already innovating at the highest levels of implementation for Fortune 500 corporations and provides an industry leading Linux product suite for data center management. This merger could have a major impact on the future of CentOS.
IBM's Red Hat Acquisition: Media Reaction, Developer Reports, & Industry Analysis
Initial reaction to the deal centered primarily around business analysis of the outlook for IBM, which is acquiring more corporate debt as part of the transaction, and the hype of the cloud data center services market, where IBM is challenging AWS, Google, & Microsoft for leadership. In a published initial reaction to the merger of IBM & Red Hat resources, Red Hat president and CEO Jim Whitehurst wrote to employees:
Powered by IBM, we can dramatically scale and accelerate what we are doing today. Imagine Red Hat with greater resources to grow into the opportunity ahead of us. Imagine Red Hat with the ability to invest even more and faster to accelerate open source innovation in emerging areas. Imagine Red Hat reaching all corners of the world, with even deeper customer and partner relationships than we have today. Imagine us helping even more customers benefit from the choice and flexibility afforded by hybrid and multi-cloud. Joining forces with IBM offers all of that, years ahead of when we could have achieved it alone. Together we can become *the* leading hybrid cloud solutions provider.
Importantly, Red Hat is still Red Hat. When the transaction closes, as I noted above, we will be a distinct unit within IBM and I will report directly to Ginni. Our unwavering commitment to open source innovation remains unchanged. The independence IBM has committed to will allow Red Hat to continue building the broad ecosystem that enables customer choice and has been integral to open source’s success in the enterprise. IBM is acquiring Red Hat for our amazing people and our incredibly special culture and approach to making better software. They understand and value how and why we are different and they are committed to allowing us to remain Red Hat while scaling and accelerating all that makes us great with their resources.
Many have questioned what the deal means for the "open source community," but considering the commitment & stewardship IBM has displayed on other open source platforms and the changing software development landscape in corporate IT, this is not considered as unusual at present. What is surprising is that IBM could not build or market competitive cloud enterprise solutions software based around Linux, Open Stack, & Kubernetes at an equivalent level of quality, functionality, & security at a lower cost than the $34 billion USD required to take over Red Hat as a company. RHEL distros are available as a ready-made solutions for the 80% of the IBM client base that needs app modernization in enterprise/large institutions with the Red Hat consulting talent & innovators ready to lead implementations or train new experts on the software platforms. This offers to provide revenue streams to IBM for private consulting contracts as well as advance innovation on PaaS products available on the Bluemix cloud. However, some insiders are already concerned about what this change will mean for the CentOS Linux distribution, which is based on RHEL & used widely in the web hosting industry.
The Red Hat Enterprise Linux Subscription Model: OpenShift & OpenStack Products
When Red Hat launched in 1994, open source solutions built around the Linux operating system represented only a small minority of the market share for desktops & web servers were just being invented through new WWW protocols. The company is no longer primarily focused on building free Linux software distributions but rather builds subscription-fee licensed Linux distribution packages designed for enterprise corporate requirements that speed-up deployment times, reduce cost of services, & offer premium data security features. This model of software development plus consulting & customer service is similar to what is offered by IBM to clients internationally.
Paul Cormier of Red Hat discussed how the company needed to pivot or disrupt their own initial business model to succeed in the IT industry.
In 2002, we made a "bet the farm decision" to separate our commercial open source products from our continued investment in building open source projects. We moved away from our freely downloadable and boxed Red Hat Linux, replacing it with an enterprise subscription model and retaining the open source principles of freedom while creating a long-term sustainable business model. That release was Red Hat Linux Advanced Server. The following year, we rebranded it as Red Hat Enterprise Linux and the rest is history. There’s a lot of nuance in that, but the point is that Red Hat found a successful business model for Linux and open source, while further empowering our ability to invest and innovate in the Linux community through projects such as Fedora.
Red Hat uses the same open source software plus licensed subscription fees for enterprise use formula for the OpenShift and OpenStack distributions which offer Kubernetes solutions for data centers to use in building hybrid or multi-cloud solutions. In this way, companies can run servers locally in tandem with hardware resources from multiple public cloud providers. IBM can also repackage the services for corporations on Bluemix under the PaaS/IaaS product model.
Ginni Rometty (CEO, IBM):
Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs. The next 80 percent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales.
IBM to Acquire & Resell Red Hat Enterprise Linux, Kubernetes, & OpenStack Solutions
Arvind Krishna, Senior Vice President @IBM Hybrid Cloud, noted that the company made a $1 billion USD investment in Linux 20 years ago when few other companies were committed to open source software or operating systems. The current IBM under CEO Ginny Rometti relies on consultancy contracts with enterprise, academic, & government institutions worldwide including multiple operating systems under development by teams of programming experts for different mainframe, data center, & corporate legacy database solutions. Red Hat integrates into the IBM business structure as an independent unit initially, with potential to generate significant synergy through the availability of tailored consultancy services for clients in private data centers, multi-cloud constructs, & hybrid cloud architecture. Watson has not developed well as an income generating product for IBM, but the company is still producing military-level AI & quantum computing solutions with teams of the world's leading PhD experts in computer science within their R&D departments. Red Hat executives, founders, & board members are hoping that this better corporate finance ability will lead to more innovation in their cloud computing & data center solution products by becoming part of the new IBM and serving their global client base.
Brandon Philips - CoreOS/Red Hat:
With Operators and what we’re trying to do at CoreOS, the vision that we are continuing to execute on at Red Hat is: How do we make it possible for people across their data centers, across their clouds, bring software — whether it’s open source or non-open source — bring that cloudiness to all those different environments, and without duplicating the work every time they have to move where those servers are being hosted. The idea here is that out of the box, Kubernetes gives you these abstractions of a pod, a deployment, a service. And these are kind of just fundamental compute things which essentially allows you to run a piece of software and then give it network connectivity. Those are fundamental basic building blocks. What we find people doing, and why the public clouds have taken off so much for developers is they are able to not just say I need a VM, but I need a database, or I need a load balancer. What the Operator is doing is adding new nouns to that basic language of compute, network, and storage. Now we’re able to say compute, network, and storage, but also load balancer, also database, and also a Spark queue.
Summary: The Red Hat Linux, OpenStack, & Kubernetes products are cutting-edge replacements for legacy software & enterprise database systems that need modernization, representing 80% of IBM's existing client base. Red Hat's container management software is open source & can be used in competitor products by SUSE, Ubuntu, Oracle, Google, HPE, Microsoft, AWS, etc. but the company has an industry-leading advantage with cutting-edge programming talent. Overall, Red Hat's 12,600 employees is small compared to the $1 trillion USD market envisioned by IBM as required to scale-out advanced AI for the Fortune 500 & self-navigating vehicle networks in the next 10 years. The merger should be advantageous for all involved, especially independent Linux distributions like SUSE & Ubuntu which should see migration from RHEL from organizations that distrust IBM. Expect major cloud platform programming gains from the initial fusion with the new Cloudera-Hortonworks conglomerate another target for take-over by IBM in the near future with Hadoop.