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8 minutes reading time (1636 words)

IBM Acquires Red Hat – What does it mean and to whom

IBM’s acquisition of Red Hat makes sense on several levels: it adds a high-growth software portfolio to boost software and recurring revenue, and provides IBM with a bit of a ‘halo’ in the tech community, as it now controls the industry’s leading Open Source supplier.

Moving down a level, though, why might this acquisition matter – and to whom? Techaisle’s take on the most important angles that shaped and will determine the success of the deal. (Download Techaisle Take report)

Who does this matter to?

Imagine you are an enterprise with a large legacy infrastructure, possibly in a regulated industry (like financial services or government). You see that IT service delivery is advancing faster outside your walls than within your firm, as other businesses aggressively adopt cloud, Agile, DevOps and containers.

You are motivated to try to integrate these advanced platforms/products/methodologies into your environment as well – to capitalize on the advantages that they can deliver, or because you’re afraid that if you don’t act you’ll be left behind, watching competitors introduce new IT-enabled capabilities faster and at lower cost than you can.

In an organization like this, IT executives are unlikely to want to dive headlong into a deep/committed relationship with a public cloud provider like AWS. They will understand the importance of building a multi-cloud, hybrid IT infrastructure, but will want to manage that environment internally, with a focus on existing capabilities (both installed products and skills). “Cloud first” won’t be a living mandate – it might describe an approach to new and non-critical applications, but won’t be a serious consideration for core systems of record.

Advantages (and some potential pitfalls) of a combined IBM/Red Hat

It’s very likely that our example enterprise is an IBM client – most enterprises are – and it’s not impossible that it’s also a Red Hat client, as the company is thought to obtain a majority of its revenues from its 600 largest (of 18,000 total) clients.

Regardless of whether there is an existing Red Hat footprint in the organization, an effectively-integrated IBM/Red Hat could bring real value to the business, bringing a combination of advanced tools from Red Hat and IBM’s understanding of account-specific and industry/sector challenges, as well as professional services that can help address internal talent gaps. These firms also avoid the prospect of lock-in to AWS, Azure and/or VMware.

This last point is one of the keys to the benefits that IBM gains from the Red Hat acquisition: it now has a way to insinuate itself between major clients and hyperscale cloud providers, using OpenShift (Kubernetes, Docker) to commoditize public cloud cycles. This is a key competitive aspect to IBM’s support of open source technologies, an approach that was evident when IBM backed Linux as an alternative to Windows, reducing the core OS’s importance (and value) while concentrating attention on the more advanced WebSphere-competitive services that Microsoft was integrating within Windows on top of the OS.

IBM also benefits from the acquisition by acquiring a portfolio that is both innovative and relevant to a large swath of the market. Watson is innovative, but has (at least to date) fairly limited applicability. Red Hat’s stature as a key enabler of hybrid IT/multi-cloud IT service delivery gives IBM the ability to establish itself as an ally of firms looking to manage cloud costs and supplier influence, while simultaneously positioning IBM’s own cloud as a central multi-cloud hub.

For its part, Red Hat benefits from a connection with IBM by gaining access to virtually all major accounts, and from its association with a very stable supplier; it will also benefit from having its products deployed internally within IBM (where, for example, they will be proven as components of hybrid IT and AI architectures), from having a global professional services team to advocate for and support implementation and expansion of its products and portfolio, and from access to a vast direct sales force – and potentially, a global partner network as well (see below).

There is also some exposure for Red Hat here, too. Many Red Hat allies (such as AWS) will not view IBM as a preferred partner. These firms will take actions that could range from development of competing technologies to advocacy for non-Red Hat solutions; in the meantime, they are certain to be unenthusiastic in their support for Red Hat-based/inclusive architectures.

Strengths, Weaknesses/Questions, Opportunities and Threats

Techaisle’s brief SWOT guide to the IBM/Red Hat deal:

Strengths

Both firms focus on services, so management at each organization should be able to understand each other’s operating principles and objectives. Both also focus primarily on enterprise accounts, so the responsible professionals should have some common perspectives on sales motions and requirements.

There is also something to be said for Red Hat’s unique strengths in automation and orchestration – capabilities that are of evident utility to firms like the financial institution/government organization used in our example, but which are also important beyond the enterprise: Techaisle research has found that two-thirds of midmarket firms are using or planning to deploy hybrid IT, and that nearly 90% of these organizations consider orchestration tools to be “critical” or “very important” for deploying workloads on hybrid platforms. The research indicates that strength in orchestration translates into market relevance – meaning that IBM can expand its account footprint into the future by building on Red Hat’s portfolio.

Weaknesses/questions

The narrative above hints at two potential weaknesses in the IBM/Red Hat amalgamation. One is supplier reputation. It is very likely that IBM customers and partners will welcome the tie-in with Red Hat. As noted above, some part of the Red Hat ecosystem will not be pleased to see IBM taking a seat at the table. The question remains, how will Red Hat customers react? Will they view IBM’s involvement as a positive development, adding stability and services depth? Or will they view it as a hindrance to innovation?

There is also the issue of market focus. Red Hat and IBM are likely to reinforce/expand their common presence in the enterprise market. But what of the midmarket, and potentially, small businesses as well? How will the combined entity reach into the high-growth SMB segment – who will lead, and how will they execute? These aren’t questions we would ask if (for example) Microsoft or Dell had been Red Hat’s acquisitor. Techaisle thinks that it’s at least possible that there is ‘another shoe’ to fall here, as the potential for Red Hat’s growth will be higher if IBM can find a lead organization that is prominent within the midmarket.

Opportunities

Every IT supplier recognizes the importance of meaningful connections to the developer community. Red Hat’s deep connection with developers may help IBM to build important links to key technical influencers – and blunts, at least to some extent, a key AWS competitive strength, and erodes, to an even greater degree, the momentum Microsoft seized when it acquired GitHub. With Red Hat (especially, OpenShift) as a lever, IBM can alter narratives that drive customers to AWS and Azure.

Threats

IT industry acquisitions are hard; in the past, brave talk about how synergies mean that ‘one plus one equals three’ have been dashed by the reality that integration of operations and go-to-market strategies and teams devour much of the potential envisioned in early releases and pronouncements.

Beyond this generic observation, IBM’s software portfolio has grown through a series of sometimes ill-matched companies and capabilities; it is sometimes derided as consisting of a bunch of differently-shaped boxes, tied together with miles of duct tape bearing the IBM Global Services imprimatur. Will Red Hat end up as yet another set of boxes, tied in with more yards of logoed silver tape? Not necessarily: but avoiding this fate requires that either a) IBM leaves Red Hat to function independently (much as EMC and later Dell did with VMware), which may be satisfying for staff and customers, but eliminates any synergy benefits, positioning IBM as strictly an investor; or b) that IBM is able to integrate Red Hat to a meaningful degree, delivering a cohesive vision and go-to-market strategy. Based on industry experience/history, neither approach is assured, or assured of success.

Wild card: what about the partners?

One potential wild card in this deal is the potential for IBM’s global partner community to define and develop new opportunities for Red Hat technology. Since IBM divested itself of core platform technologies (for example, x86 servers), it and its partners have struggled to gain traction beyond relatively narrow niche solutions. There is at least the potential for IBM partners to expand their influence within customer accounts by positioning Red Hat as the key to building a platform for hybrid service delivery – and If IBM is able to embed Red Hat tools within the strategies of its partners, it can establish a base for advanced solutions in highest-priority market segments: cloud of course, but also cognitive/AI, mobility and emerging technologies (e.g., Blockchain). It’s possible that partners may also spearhead midmarket sales, driving Red Hat/IBM success outside the enterprise.

But for today, there is much work to do. IBM needs to understand how to both onboard Red Hat partners and incent its own partners to integrate Red Hat into their portfolios. There will be technical, financial and political challenges at all levels of all of the firms involved – IBM, Red Hat and the thousands of PartnerWorld and Red Hat partner businesses. Can these challenges be met, and can the deal ultimately yield real benefits for IBM, for Red Hat heritage staff, for customers and for partners? Yes, it can, but…the acquisition only opens a door that looks onto this future. There is still quite a lot of work to be done before the vision grows roots and expands to contribute meaningfully to success throughout the IBM/Red Hat customer and partner ecosystems.

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