It’s been the biggest year ever for mergers and acquisitions in the enterprise technology space. The year began with Cisco buying application performance monitoring tool AppDynamics for $3.7 billion. A few months later, Salesforce ponied up $6.5 billion for the enterprise data integration company Mulesoft. A couple of months after that and Microsoft gets in on the action by swooping up GitHub for a neat $7.5 billion. Each of these acquisitions broke new ground in terms of how big a tech M&A can get. Yet, if all this wasn’t enough, the biggest news broke in the last quarter of the year as IBM acquired Red Hat in a whole cash deal for $34 billion. This IBM-Red Hat deal is big, and not just because it’s a huge sum of money changing hands, but because of what it shows about the technology industry at large.
All about open source
The IBM-Red Hat deal is significant as an indicator of the value and power of open source in today’s enterprise landscape. Gone are the days when a few large vendors like Oracle and Cisco, and IBM itself dictated which hardware and software should power enterprise systems. Today, open source software has made all the difference by taking computing from being hardware-centric to being software-centric, and that, too, centered on open source software.
Linux is the most widely used open source software in the world. Mention Linux, and the first company that comes to mind is Red Hat. Indeed, it has been a shining beacon for a company that can be profitable despite operating around open source principles. While other similar companies like Mozilla have had a hard time monetizing their products and services, Red Hat has figured out how to monetize open source and is a large and profitable company in its own right.
Red Hat is the top contributor to the Linux project, and surprisingly it’s not just Red Hat — IBM itself makes it to the top five list of contributors to Linux. This is an important common ground between the two organizations. However, this deal is not about Linux. It’s about Linux’s counterpart in the cloud — Kubernetes
The real reason — Kubernetes
Since Docker came on the scene in 2014, application development has never been the same for enterprises. From hardware servers to virtual servers, organizations started migrating to nimble containers. However, simply moving resources to containers isn’t “job done.” In fact, it takes a whole lot more to maintain container than it does to simply migrate resources to them. This is where the need for Kubernetes was born.
Released by Google, which has been running containers internally long before Docker, Kubernetes was a runaway success as a container orchestration tool. A consortium — The Cloud Native Computing Foundation (CNCF) was formed to adopt Kubernetes, and soon, every cloud vendor including IBM and Red Hat were on board to oversee and direct the future of Kubernetes.
Red Hat’s cloud platform OpenShift began as a PaaS platform, but in 2016 completely changed direction to become a container platform providing Kubernetes-as-a-service. Still, OpenShift was more the offbeat alternative for companies that, for whatever reason, didn’t want to go with the top three cloud vendors — AWS, Azure, or Google Cloud Platform. In an attempt to close this gap, Red Hat acquired Core OS for $250 million in Jan 2018. I wrote about this deal saying that Red Hat was after Core OS’ prowess with Kubernetes. The deal sure put Red Hat higher up on the scale of cloud vendors providing Kubernetes services. A few months down the line, and it seems like that acquisition has more than paid off for Red Hat with IBM being drawn to it as a powerhouse of Kubernetes talent. With this acquisition, IBM gets Red Hat’s OpenShift platform and Core OS’ Tectonic platform. Suddenly, IBM has a lot of groundbreaking technology to integrate or adapt as it builds the Kubernetes platform of the future.
Pie in the clouds
From IBM’s perspective, the single biggest motivator for this deal is the opportunity that cloud computing promises. In an interview with CNBC, IBM chief executive Ginni Rometty said that cloud computing is a “$1 trillion emerging market.” All cloud computing vendors are seeing huge growth in revenues driven by the mass migration from on-premises datacenters to cloud infrastructure. Not surprisingly, IBM wants to be at the top of the food chain in the cloud.
Recent projections show that there’s a tussle for first and second place between AWS and Azure, with Google Cloud and IBM vying closely for places three and four. Indeed, AWS has the first-mover advantage and has a lead in terms of adoption, but in terms of revenue, Azure has caught up to AWS in just this past year. Their annual revenues are around the $20 billion mark. Rometty says that what we’ve accomplished with the cloud so far is just the initial 20 percent — the easy part. She believes that the remaining 80 percent is the hard part, and this is where IBM hopes to emerge as the leader. While the first 20 percent was about moving resources to the cloud, the remaining 80 percent is going to be about managing and scaling resources in the cloud efficiently and leveraging the cloud for advanced use cases like artificial intelligence and machine learning.
Hybrid vs. lock-in
Rometty mentioned that IBM’s customers typically have between 5-15 cloud platforms currently and are struggling to manage them. Additionally, many organizations need to still keep some of their apps and data on-premises for various reasons. While these organizations keep critical data on-premises, they still need to power of the cloud to help them handle the explosive growth that is typical of modern day applications. In a hybrid world like this, what’s needed is a management layer that can manage your data irrespective of where it is stored. This includes moving workloads between clouds and taking a best-of-breed approach to infrastructure.
The cloud vendors themselves are walking a thin line between hybrid and lock-in. Every cloud vendor is investing heavily into its own proprietary products on the one hand while simultaneously supporting open source tools that are the industry standard. The one open source tool that every cloud vendor unanimously relies on today is Kubernetes. And coincidentally, Kubernetes is making the hybrid cloud more possible. While most cloud vendors, including IBM, are beefing up their cloud platform, Red Hat stands in contrast to them being a neutral “Switzerland” for cloud computing. It supports all cloud vendors and helps organizations get the most out of their workloads no matter where they’re run.
The road ahead
Post-acquisition, Red Hat promises things won’t change — that they’ll still support the same cloud platforms while giving extra emphasis to IBM Cloud. Red Hat CEO Jim Whitehurst says that the company needs the leverage IBM can give them. This means both financial backing and a ready list of IBM’s enterprise clients that would be open to this partnership. Red Hat needs the financial firepower to take on its much larger rivals in the cloud space, and IBM is just the parent organization to encourage these ambitions.
While Red Hat has a good footprint in terms of enterprise Linux, it’s a completely different ball game with Kubernetes, and Red Hat needs to start from scratch selling the benefits of the cloud to traditional organizations, and helping them get up and running. Here, IBM Cloud is the veteran with its deeper and wider reach of enterprises.
One concern raised by Red Hat loyalists is that the “closed” culture of IBM stands in contrast to the principles that Red Hat has always been built on. Responding to this, Whitehurst promises that Red Hat will be independent of IBM, and if anything, hopes that the vibrant, open culture of Red Hat will rub off on IBM rather than the other way round. While IBM isn’t anti-open source as some believe, culture will play a key role in this acquisition to be truly successful. Whitehurst staying on post-acquisition is a good sign that this is very possible.
IBM-Red Hat deal: A good sign for startups
If large organizations like Red Hat are acquired, it shows the value of companies in the space. Big players see M&As as a great way to speed up and expand operations, and this is a good sign for startups that look at acquisitions as the ideal exit strategy. While $34 billion is a hefty price tag, the cloud computing market is so big, that if IBM plays its cards right, this price would seem like a bargain over the next few years.
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