Cloud

How the cloud wars forced IBM to buy Red Hat for $34 billion

IBM's purchase of Red Hat is a big bet on the hybrid and private cloud and the ability of Big Blue to manage multiple public cloud providers. Here are a few dynamics to ponder.

This article originally appeared on ZDNet.

IBM paid $34 billion for Red Hat and a chance to be a cloud player—private, public and hybrid—with an ultimate goal of managing multiple clouds in the enterprise.

The Red Hat deal is IBM's biggest acquisition yet for a reason: The stakes are too high and IBM has already been bumped out of the big cloud conversation by Amazon Web Services, Google Cloud Platform and Microsoft Azure.

If you can't be a big public cloud provider why not simply manage them?

IBM to acquire Red Hat for $34 billion | Red Hat leaders praise IBM acquisition, but employees are worried | IBM, Red Hat couple containers for hybrid cloud deployments | IBM Cloud Private for Data preps Red Hat OpenShift certification, queryplex search tool

Now you know the appeal of Red Hat. Sure, open source folks will worry about IBM's purchase, but Big Blue has been a good steward of open source. And yes, enterprises will go from Red Hat—a proverbial Switzerland of software and the cloud—to an IBM-Red Hat combination and one throat to choke.

But it's hard to argue the IBM-Red Hat logic. The game plan revolves around the hybrid cloud and managing multiple environments. Red Hat gives IBM software heft and an OpenStack playbook that can rival VMware, which incidentally has become quite cozy with AWS.

Top cloud providers 2018: How AWS, Microsoft, Google, IBM, Oracle, Alibaba stack up | Everything you need to know about the cloud, explained | Vendor comparison: Microsoft Azure, Amazon AWS, and Google Cloud | Cloud wars 2018: 6 things we learned in the first half

The details are worth noting:

  • IBM will pay $190 per Red Hat share in cash.
  • IBM CEO Ginni Rometty dissed the public cloud and noted that most companies are 20 percent along the cloud journey and "renting compute power to cut costs." The next 80 percent is about hybrid cloud.
  • Red Hat CEO Jim Whitehurst said IBM will give it scale while preserving an open source commitment.
  • Both Red Hat and IBM said the combined company will accelerate "hybrid multi-cloud adoption."
  • Red Hat will remain a distinct unit in IBM's Hybrid Cloud unit and provide Big Blue with growth, software revenue and a way to grow the cloud business.
  • IBM said it will make the purchase with cash, credit and bridge lines, but did note that it would be disciplined to preserve its credit rating. IBM will stop buying back its own shares.

Will it work? Skeptics abound. Steven Vaughn-Nichols already noted that employees are wary.

Patrick Moorhead, principal of Moor Insights & Strategy, said:

It's not immediately obvious to me how the marriage between IBM and Red Hat brings combined value to the market. Both Red Hat and IBM both participate in the enterprise and private cloud market together, already. This will likely not impact IBM's stature in the public cloud where the companies have a presence, but not nearly as much as the private cloud.

Wall Street types are likely to worry about the premium and IBM's ability to grow even with Red Hat.

After all, IBM's businesses—including the cognitive and cloud businesses—struggled in the third quarter. Red Hat can provide cross sell opportunities to juice growth on multiple fronts.

ibmcloudwars.png

Yes, IBM is clearly going with the private cloud spin, but the longer play is the multi-cloud management. Are you likely to use open standards to manage multiple clouds or something proprietary? IBM's bet is that Red Hat will give it a strong case to allow Big Blue to manage your clouds, AI and security.

What's unclear is whether enterprises will value a best-of-breed cloud approach or simply go with the lock-in, one throat to choke and simplicity of one vendor. There's a reason cloud providers can tout "all in" customers: Enterprises can resist the discounts. In 25 years of covering the tech industry, I've frequently been surprised by the ability of enterprises to repeat the same lock-in mistakes.

The IBM-Red Hat deal may be a hybrid play in another way. The bet is that enterprises will get their one big contract they are used to yet feel open enough to play with multiple vendors. IBM's Red Hat purchase is a way to attempt a cloud leap frog and rise above the public cloud battlefield that now consists of AWS, Microsoft and Google.

About Larry Dignan

Larry Dignan is Editor in Chief of ZDNet and Editorial Director of TechRepublic.

Editor's Picks

Free Newsletters, In your Inbox