By Charles King, Pund-IT, Inc. October 31, 2018
That barn buster acquisitions are more common in IT than other industries says as much about the dynamism of the tech sector as it does about specific business circumstances. The fact is that most IT vendors are constantly on the hunt for a competitive edge, and in an industry that changes as rapidly as tech, acquiring external assets often delivers a bigger bang for the buck faster than internal development efforts.
That said, simply buying another company is anything but a slam dunk, even for large, well-funded deals. Critical issues can aid acquisitions from the get-go or contribute to eventual massive failures, like HP’s costly acquisitions of Compaq and EDS. The best deals are those in which the involved companies are well-aligned technologically, strategically and culturally.
IBM’s plan to acquire Linux and open source leader Red Hat for $190 per share ($34B in total value) qualifies as just that sort of plan. Let’s consider what makes a successful IT acquisition and why IBM and Red Hat seem likely to make their pairing work.
Compatibility. Compatibility. Compatibility
If there’s a version of the three keys to successful real estate (“Location. Location. Location.”) that applies to IT acquisitions, it revolves around compatibility. It’s not that acquiring and acquired firms need to fully mirror one another, like reuniting a lost twin—so much as being fully or largely compatible technologically, strategically and culturally.
The first is a no-brainer that should only be ignored if the corporate buyer wants to explore entirely new and unfamiliar markets and sectors. If that’s the case, purchasing or merging with a successful specialty company with deep knowledge of the target market makes eminent sense.
Skipping strategic compatibility is hard, too, since it requires both companies to act outside of their expertise and comfort zones. That’s not the case with IBM and Red Hat which have been strategic partners for nearly 20 years, since IBM became the first Tier 1 vendor to publicly support Linux development and distributions. IBM has supported Red Hat’s evolving enterprise-grade solutions since then, most recently its OpenShift container platform. Red Hat is also a key element in IBM’s LinuxONE mainframes and Linux on Power System solutions.
Cultural compatibility is a far slipperier issue that typically requires time to sort out. In fact, it’s usually easier to spot by its absence. Consider, for example, the swarm of senior Sun Microsystems executives, including Java founder James Gosling and XML co-inventor Tim Bray, who departed the company after it was acquired by Oracle in 2010. In many cases, those departures resulted from profound cultural disagreements and disappointments, including concerns about Oracle’s plans for Sun’s rich store of open source solutions and resources.
Such friction seems unlikely to beset IBM and Red Hat. IBM wasn’t just the first major vendor to publicly support Linux—over the past two decades, it has invested billions of dollars and tens of thousands of worker hours on a wide range of open source initiatives and projects. In fact, it’s difficult to think of a major IT vendor with stronger open source credibility than IBM.
IBM is also ensuring that Red Hat’s leadership and employees understand its intentions. As part of the announcement, IBM said it remains committed to Red Hat’s open governance, open source contributions, participation in the open source community and development model, and fostering its widespread developer ecosystem. In addition, IBM and Red Hat will remain committed to the continued freedom of open source, via such efforts as Patent Promise, GPL Cooperation Commitment, the Open Invention Network and the LOT Network.
That doesn’t mean that every Red Hat employee will be satisfied or that all of them will stay happily in place after the deal closes. The fact is that despite operating as a separate unit within IBM’s Hybrid Cloud team, working in an enterprise with some 380,000 employees is distinctly different than being part of an organization with Red Hat’s current 12,000+ workers. Not everyone will willingly, joyfully or successfully make the transition.
Both companies also went out of their way to affirm that they’ll continue to build and enhance existing Red Hat partnerships, including those with major cloud providers, such as Amazon Web Services, Microsoft Azure, Google Cloud, Alibaba and others, in addition to the IBM Cloud. Some may consider that mere lip service but given the number of critical technologies Red Hat has in its arsenal, it’s an important point to emphasize.
Hybrid cloud in the crosshairs
So what key opportunities do the companies hope to explore together? IBM is clearly positioning the deal as key to its hybrid cloud strategy. The central pitch is that, 1) rather than locking themselves into relationships with single cloud vendors, organizations are instead using multiple clouds for specific processes and applications, and 2) to date, enterprises have only employed cloud for about 20% of their potential workloads.
Market research data from IDC and others bears this out, including recent studies showing public cloud customers “repatriating” workloads and data once entrusted to cloud service providers (CSPs). Though even the largest CSPs are underscoring their ability to make nice with one another, most are also working hard to make sure clients stick with them as closely as possible.
IBM Cloud’s position is unique due to its focus on enterprise-specific requirements and scale, and the larger company’s longtime efforts working with the world’s largest organizations. In other words, IBM is positioning itself as the vendor businesses can count on to help efficiently and effectively support the work they do in clouds of every size and kind.
Open source is a critical element in virtually all cloud environments and use cases, including those focused on proprietary platforms and applications. However, for hybrid cloud implementations, Docker/Kubernetes-based container technologies are crucial for managing the movement and performance of workloads and data residing in multiple clouds. Red Hat’s OpenShift container platform has been gaining momentum as the container platform of choice for major CSPs, including IBM Cloud, Microsoft Azure and AWS.
In other words, there isn’t a better ally for hybrid cloud than Red Hat, but does IBM really need to buy the company? Why not simply continue partnering?
It seems likely that factors not entirely visible may be at play. For one thing, Red Hat’s situation is somewhat analogous to VMware’s in 2003, prior to its purchase by EMC. VMware wanted and needed to be acquired in order to achieve its full scale and potential, and was being pursued by several suitors, including at least one it seriously wanted to avoid. EMC was optimal because it had none of the problematic conflicts that OS and system vendors carried, and the deal was done to everyone’s satisfaction (not including those other suitors).
If Red Hat was quietly shopping itself, it’s likely that companies other than IBM were checking the paint and kicking the tires—Cisco and Oracle are two that have been mentioned, but others may have sniffed around. The premium IBM is offering (approximately 50% above Red Hat’s closing price on the Friday before the announcement) is likely scared-off hangers-on and table stakes of $34B would give most others pause.
That doesn’t mean that IBM is over-paying or throwing money away. The company’s acquisition history shows it to be an astute judge of value but also willing to go full freight for the right property. IBM’s estimation that hybrid cloud represents a $1 trillion opportunity may be somewhat optimistic. But bringing Red Hat aboard places the company in an excellent position to stand out in that rapidly growing market. Plus, adding Red Hat’s healthy revenues (nearly $3B in FY 2017) will substantially bolster IBM Cloud’s market position and bragging rights.
In short, the IBM/Red Hat deal marks off virtually all the boxes on the technical, strategic and cultural compatibility chart. Only the third point—cultural issues—offers some cause for concern. But that’s something that impacts nearly every acquisition made by a Tier 1 vendor and is one that IBM has successfully faced and managed numerous times in the past.
Does the deal leave any dead or injured? Other interested buyers, if there were any, are certainly disappointed. Plus, the pressure will likely ratchet-up on other Linux vendors, like SuSE and Cannonical (Ubuntu), as well as organizations developing and promoting enterprise-grade container technologies. At the same time, the deal could well push some of those companies into play among vendors who feel they need to follow IBM and Red Hat’s lead.
Overall, IBM’s plan to acquire Red Hat should be good for both companies and their respective employees, customers and partners. The alliance should also be seen as excellent news for prospective customers, including those considering or searching for optimal solutions for implementing hybrid cloud. If the demand for hybrid cloud develops as many believe, IBM and Red Hat will become a force to be reckoned with.
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