So… IBM this weekend confirmed rumors that have been swirling for a few days around its intention to acquire open source services company Red Hat. The deal, one of the largest tech acquisitions of all time (see below) positions IBM as a key enabler of new types of infrastructure. Red Hat is not only deeply involved and highly successful at monetizing Linux, but it is also a big player in a number of other open source movements (OpenStack and OpenShift among them.)

In terms of the numbers, this deal will be the largest software acquisition ever and third largest technology acquisition to date (behind the Dell/EMC and Avago/Broadcom deals.)

In terms of trading multiples, the acquisition is an 11x multiple on 2017 Red Hat revenues, not at all bad for a company with 21% growth.

There are lots of ways to look at this, and here are a few…

It’s not a get out of jail card. M&A integrations are hard

Let’s face it, while IBM has a long involvement in the open source community, the general perception of IBM is of a big, slow and inflexible player with a thin veneer of cool stuff on top to appease those who like that stuff. This acquisition doesn’t fundamentally change that perception and, if previous large vendor acquisitions are anything to go by, this won’t be a smooth process.

While IBM has been very clear, stating that the incumbent culture and management team within Red Hat is staying, the fact of the matter is that when all of those multitudinous layers of middle management get involved, it’s hard to see anything other than Red Hat becoming moribund for years as the integration process occurs.

The process itself is one issue, but what then when the integration is complete? While the intention is to have Red Hat as a standalone business unit, the norm in these situations is that all the bad stuff of the acquirer (slowness, empire-protection, and denial) comes across and “infects” the smaller player. As one pundit commented:

Remember where open source IP lives

Red Hat has done a great job of monetizing Linux. It’s not done such a good job of monetizing the other open source initiatives it’s involved with, but is still trying hard. The fact of the matter is that successfully leveraging open source to make money takes skilled and committed individuals. If history tells us anything, it is that when these sorts of acquisitions occur, the best people flee quickly. That is a every real risk for IBM, an integration process that lasts a few years may well end up with a mere shell of what Red Hat once was as people avoid the seemingly inevitable dulling down of the Red Hat culture.

One Red Hat staffer, who came to the company through its own acquisition of another player, was hardly glowing in their prognosis:

Does this mean Watson is laid to rest?

Ever since Watson, IBM’s artificial intelligence play, famously won the Jeopardy game show, IBM has been telling how Watson was the secret to its future success. This despite the very real fact that for five or six years IBM has seen plummeting financial performance.

Watson never really delivered upon the promise and if we fast forward to today, bigger cloud players (think AWS, Microsoft, and Google) have commoditized much of this AI toolset. AI certainly is the future, but it’s looking less likely that Watson is a big part of that equation.

SO if you’re on a downward financial spiral and your stated key differentiator isn’t doing the business, you look elsewhere. In IBM’s case, it did so and went back to its infrastructure roots, by buying a vendor that has seen proven success in services around open source.

But, to really leverage that acquisition, you need an ability to scale that service offering, and given the perception of IBM in the marketplace, that isn’t an easy thing to do.

MyPOV

I’m not buying it. This deal is, in my view, at best neutral for IBM. It is, however (and also in my view) negative for Red Hat who will now suffer through a long and convoluted process to first seek regulatory approval and then integrate into the mothership. Meanwhile, the best and brightest within Red Hat will quietly (or not so) look elsewhere and jump ship.

At the same time, Red Hat’s biggest competitors in the open source world will be rubbing their hands with glee. Every single sales call they now make will be prefixed with comments around how Red Hat is a very unsafe customer choice to make given the lack of clarity around their future. Expect a significant investment from both Canonical and SUSE in articulating a strong differentiator around these lines. Also look for these vendors to be acquired by those large vendors who missed out on this deal – Google, Microsoft, and Cisco spring to mind for a start.

Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

1 Comment
  • Oracle must be horrified with this, since Oracle Linux is downstream from Redhat. It will be interesting to see what unfolds. So they have two choices, keep Redhat separate like MS has done for LinkedIn(we don’t really know how well that is going) or merge it like Oracle has done with all it’s previous acquisitions.

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