451 Alliance Report

Special Report

Alliance Members Take on IBM’s Acquisition of Red Hat

December 19, 2018

By Tracy Corbo

On October 28, IBM announced its plans to acquire Red Hat. The deal is IBM’s largest technology acquisition to date, valued at $34bn. According to 451 Research's M&A KnowledgeBase, it is the largest tech acquisition since 2002, and one of the top five in US technology history. Upon completion of the transaction, Red Hat will operate as a distinct unit within IBM’s Hybrid Cloud organization.

For quite some time, IBM has been under growing pressure from investors to increase revenue. The company’s big bet on artificial intelligence/machine leaning (i.e., its Cognitive Solutions division) has failed to grow at the same pace as major competitors’ comparable units. This acquisition takes IBM’s bid for growth in a different direction, with the expectation of bolstering its cloud game and positioning it as the leader in building, managing and operating multi-cloud and hybrid IT environments.

Red Hat and IBM have enjoyed a long-term partnership that spans the majority of its 25-year history. Some critics express concern about whether IBM will keep its promise to maintain Red Hat as an open platform that supports multiple cloud solutions. This will be important to enable Red Hat to continue its ongoing work in container technology around Kubernetes and OpenShift. Others worry about potential regulatory issues, both domestic and international

If IBM intends to position itself as the go-to vendor for hybrid cloud, then it is in its best interest to maintain cloud neutrality and keep Red Hat’s platforms open. In fact, it makes sense for it to build upon this foundation, in effect positioning IBM as the cloud middleware platform that glues together the disparate pieces of on- and off-premises computing. IBM could be the vendor to lead the charge toward digital transformation, especially for companies struggling to integrate their infrastructure across on- and off-premises platforms and technologies.

A November survey of 586 members of the 451 Alliance was conducted to get the Alliance take on the acquisition and its expected impact on their individual organizations.

First Take

The deal is not expected to close until the second half of 2019, so these results provide an initial look at the impact. The first impression is largely neutral – a solid 40% are taking a wait-and-see approach toward the acquisition, with optimists (31%) and pessimists (29%) being fairly evenly split.

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Forty percent of survey respondents are customers of both IBM and Red Hat. Another 19% are Red Hat-only customers, and 10% are IBM-only. Less than one-third of respondents (30%) are not customers of either vendor.

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For both IBM and Red Hat customers, the acquisition represents a potential disruption to the business that will impact new and ongoing projects, as well as partnerships. Overall, IBM-only customers are more positive about the acquisition than those who are Red Hat-only customers.

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Pros and Cons

Looking at the top concerns for both IBM-only and Red Hat-only customers, the prospect of vendor lock-in emerged as a key concern. These customers feel that the acquisition would limit their choice of vendors.

Avoidance of vendor lock-in is a common motivation for choosing open source technology solutions; therefore, it is somewhat surprising that IBM-only and Red Hat-only customers expressed similar levels of concern on this front.

Regarding whether the two companies are a good fit, 41% of IBM-only customers expressed concern about the compatibility of an IBM-Red Hat combination. Feeding into this perspective may be the fact that the IBM-only customers surveyed tend to be older companies (more than 10 years old), are more conservative in their attitudes toward technology adoption and are typically in the very early stages of executing on digital transformation strategies.

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However, organizations do see upsides to the deal. One-third of IBM-only customers and one-quarter of Red Hat-only customers see the deal as a boon for open source solutions. IBM, already an active participant in various open source communities, has the scope to raise its profile in this area with the acquisition of Red Hat.

Red Hat, an early pioneer in commercializing open source technologies (i.e., Red Hat Enterprise Linux), participates in and contributes to a number of projects that are emerging as foundational elements of multi-cloud/hybrid IT, including Kubernetes-based container orchestration and management.

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Hybrid Cloud

Over three-quarters of organizations that are Red Hat-only or joint IBM-Red Hat customers view hybrid cloud as playing a key role in their organizations’ IT going forward. Hybrid cloud also emerges as an important element of digital transformation. Joint IBM-Red Hat and Red Hat-only customers posted higher rates of digital transformation execution compared with IBM-only customers (nearly 60% versus 35%).

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Vendor Positioning

The customer lens colors vendor perception. IBM-only customers view IBM first and foremost as an enterprise IT vendor, while Red Hat-only customers view IBM as both an enterprise vendor and a services supplier. Among organizations using both IBM and Red Hat, IBM is seen primarily as a software supplier.

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Red Hat-only customers view Red Hat first and foremost as an open source provider, its identity as a software supplier comes in second. By contrast, IBM-only customers view Red Hat as a software supplier first and an open source vendor second. Organizations that use both vendors identify Red Hat more strongly as a software provider first, with the open source supplier persona being a more distant second.

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Looking at the post-deal impact on working with IBM, a majority of IBM-only customers expect no changes, as do 39% of Red Hat-only customers. However, more than 40% of Red Hat-only customers expect things to be more complicated.

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Employee Impact

Organizations had contrasting perspectives on the deal’s impact on the current employees of each company. The impact on IBM employees is seen as being neutral to positive, while the initial impression is grimmer for Red Hat employees, with half of respondents predicting a negative impact.

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