IBM Red Hat: the two companies are coming together; the result will be a super power in the Linux world, but a relative minnow in the cloud business. But they seek to dominate hybrid cloud solutions and give companies an alternative to the big three. Can they pull it off?
The two companies argue that this deal will completely change the cloud landscape and make IBM the world’s number 1 hybrid cloud provider. Are they right?
The IBM Red Hat deal
The IBM Red Hat deal is costing Big Blue $34 billion, only just over three times its market cap, so for IBM this is a massive move.
From Goliath to David
IBM is in fact valued at $113 billion, these days that’s not big, not compared to the giant techs that IBM once dominated. IBM has been worth more, in fact it was worth almost double the current value in 2013, but relative to its competitors, its glory days were long ago. In 1999, it was worth more than it is now — although even then, it felt like a has been. That year Microsoft was worth more than double IBM. Cisco, Intel, Lucent Technologies and Nokia were all bigger.
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No, relative to the opposition, IBM’s best days were long ago, in the early days of the PC, when it was Goliath, and the likes of Apple and Microsoft weren’t even big enough to be David.
That does not make the story of IBM a complete disaster, tech has grown, and while IBM has gone from tech super star to light heavyweight, it has grown as a company. It’s current share price is seven-fold up since it was first listed in 1978.
But in the cloud business Amazon — AWS, Microsoft — Azure, and Alphabet — GCB, are the dominant platforms.
The gamble
The Big Blue gamble is that the IBM/Red Hat combination can dominate the hybrid market, become what one report described as the Switzerland of the Cloud, a base for companies that don’t want to leave all their eggs in one of the three big baskets.
But the price it has paid for Red Hat represents a 67% premium on for Red Hat share price at close of play on Friday. Its gamble is that the company can find value in Red Hat, which its larger rivals, with deeper pockets could not see.
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There are no shortage of doubters; IBM missed the Cloud opportunity and is always playing catch-up, always a step behind, they say. They argue that this deal is no exception, a deal made from desperation.
But is such criticism fair? IBM remains a highly innovative company, it is truly cutting edge in the field of nanotechnology, and its close cousin quantum computing.
The company that gave the world the ATM, the hard drive and floppy disc, is a pioneer in trying to trying to find a nanotech solution to the superbug threat in preparation for the day when antibiotics cease to work. It may seem to have lost its lead in AI, but Watson remains a potentially highly valuable solution in healthcare.
As for Linux, IBM’s decision to ditch its Mr Proprietary image and embrace open source, all those years ago, was brave, and maybe in combination with Red Hat’s services including OpenShift, which competes with Heroku from Salesforce, it can become truly competitive again.
Don’t forget, IBM and Red Hat have been working closely for some time; IBM knows Red Hat well, one could almost say intimately, a point that critics of the IBM Red Hat merger overlook.
“It’s a game changer,” said Ginni Rometty, IBM Chairman, President and Chief Executive Officer of IBM. “IBM will become the world’s first hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”
She continued: “Most companies today are only 20% along their cloud journey, renting computer power to cut costs. The next 80% 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.”
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For its part, Red Hat emphasised the role the company will play in the Linux world.
Jim Whitehurst, President and CEO, Red Hat, said: “Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise. Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience — all while preserving our unique culture and unwavering commitment to open source innovation.”
As for Amazon, Microsoft and Alphabet, they may think they are too big to fret about an IBM Red Hat combination, but then Goliath thought he was too big to worry about David.
