The deal costed $34 billion, and could have massive implications for the ecosystems of both companies.
Open source giant Red Hat was acquired by IBM on Sunday for a whopping $34 billion, capping off a long-standing partnership between the two companies, the pair announced in a press release.
Red Hat, known for its model of taking open source platforms and tools and making them enterprise-friendly, was also lauded as the first multi-billion-dollar open source company. Reactions to the deal were mixed, with Red Hat leaders praising the deal, but employees and various tech leaders on Twitter raising concerns about it.
SEE: Open source vs. proprietary software: A look at the pros and cons (Tech Pro Research)
Regardless of the high price tag, or the politics of such an acquisition, there are still a host of implications for the IT world. Here are the five most important things for IT leaders to know about the IBM/Red Hat deal.
1. It's all about the cloud
In the official Red Hat press release, cited above, the word "cloud" is mentioned roughly 40 times. As IBM CEO Ginni Rometty said in the same release, the deal is about making IBM a leader in hybrid multi-cloud adoption. As ZDNet's Larry Dignan wrote, IBM is looking to manage public cloud providers in order to better compete with leaders in the space including Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform.
In a statement, Forrester vice president and principal analyst Dave Bartoletti, said that the deal "gives IBM a new stronghold in the cloud development platforms market."
"The combined company has a leading Kubernetes and container-based cloud-native development platform, and a much broader open source middleware and developer tools portfolio than either company separately," Bartoletti said in the statement. "While any acquisition of this size will take time to play out, the combined company will be sure to reshape the open source and cloud platforms market for years to come."
Ryan Duguid, chief evangelist at Nintex, said that it may be too little, too late, though. Duguid argued that the investment might not be sufficient enough to give IBM a leg up on other cloud giants.
"No doubt the acquisition is good news for enterprises looking to shift classic VM or container-based applications to the cloud, with a stack that is now backed by IBM, but at the end of the day, Amazon has captured much of that market, and when it comes to building modern apps, there are far better approaches," Duguid said.
2. All things considered, it's the best case scenario
Many in the open source community have lamented the acquisition of Red Hat. Red Hat represented what few thought was possible with open source—building an independent company to the tune of billions of dollars. But, sticking to one's principles doesn't always pay the bills.
Considering Red Hat's other rumored suitors (Google, Oracle, Dell EMC), IBM has a pretty good track record at protecting open source data, as noted by Dignan on ZDNet. In the press release, IBM committed to maintaining Red Hat's culture and not curtailing its partner ecosystem. That means that Red Hat will be allowed to continue working with AWS, Google Cloud, and Microsoft Azure.
"Of course, IBM has course corrected many times over the years, and I expect them to put significant investment into the platform," Duguid said. "For developers on the open source stack, that's good news as the investment will only make Red Hat better. Some may fear that Big Blue will ruin their platform of choice, but I expect the best enterprise application architects and developers will see it as a win all around."
3. Data and AI's value isn't fully realized
As IBM began its transition away from its legacy hardware business, it made a big bet on data. And it wasn't alone in making that bet, as tech pundits were calling data "the new oil" and claiming it held unheard of value that was yet untapped. Except that it wasn't. Recently, IBM's Cognitive Solutions division—the home of Watson—was one of the worst performing segments of the company.
However, while data and artificial intelligence (AI) can add tremendously to many organizations' digital initiatives, they don't hold a candle to the amount of revenue generated by the cloud; specifically, the public cloud. IBM made its play with SoftLayer, and wasn't able to gain the type of steam it needed to compete with the giants. Now, it's trying again with Red Hat.
4. The integration will be fast and fragile
With IBM's flat revenues in Q3 2018, the company needs a quick injection of innovation to get the ball rolling and inspire shareholder confidence. That mean the company will likely try to integrate Red Hat quickly, which will undoubtedly be aided by their shared proximity in North Carolina's Research Triangle. However, IBM needs to do this without damaging Red Hat.
"IBM will do good at not 'breaking' Red Hat, and starting as a separate unit is a good start," Constellation Research principal analyst Holger Mueller wrote in his blog. "With Whitehurst reporting directly to Rometty, Red Hat will have a voice at the executive table. The challenge for Whitehurst will be to keep employees motivated, deliver on roadmap and try to keep negative 'IBMization' effects away from Red Hat as much as possible. Keeping partners will be a key challenge in the first weeks."
5. Little immediate impact
As pointed out by Mueller, there will be little to no immediate impact for most parties involved in this deal. There are hardly any implications for IBM customers and Red Hat partners, but Red Hat customers should be make sure that IBM's vision for the company fits their needs for the Red Hat products they use. Additionally, the deal could help customers see IVM as the new Switzerland of on-premises offerings, Mueller wrote, which is a trend that CXOs should watch.
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