IBM signed a deal to acquire Red Hat, a major distributor of open-source software and technology, for an eye-popping USD 34 billion, on October 28, 2018. The open source, enterprise software maker will become a unit of IBM’s Hybrid Cloud division. The acquisition is so far IBM’s largest deal ever and the third largest in the history of US tech.
MarketsandMarkets™ View Point:
According to Balaji Sreedhar – AVP, ICT Practice – Consulting & Strategy at MarketsandMarkets™, IBM is no stranger to large acquisitions and partnerships with its peers in the global technology market. Recently, Red Hat and IBM have partnered to accelerate app modernization and cloud-native development. Red Hat is one of the pioneers in the building of cloud services and is famous for its operating system – Linux. It also offers a wide range of products that enable companies to build cloud platforms in their own data centers and manage different workloads across multiple clouds. According to a recent survey conducted on the Cloud Computing market, IBM has been ranked behind its rivals Amazon, Microsoft, and Google. Although IBM’s revenue growth has hit low for the last few years, the focus has always been on tech spending and innovations.
The shares of IBM dropped to approximately one third of their value over the last 5 years, while Red Hat shares shot up to 170%. The deal announcement indicates that IBM wants to reinvent itself through acquisitions and focus on revenue growth. It might be a game changer, as the combined entity will have more compelling alternatives, and IBM will become the only company to deliver an open cloud solution to its clients. The combined entity of IBM and Red Hat is expected become the leading provider of hybrid and multi-cloud technology solutions.
Impact of Acquisition
The ecosystem of cloud computing is built on three core pillars – IaaS, PaaS, and SaaS. The underlying technologies under each category are further deployed on public or private cloud which is delivered to the end users. IBM has a strong presence in the PaaS space; however, it has a low market share in IaaS and SaaS. Ginni Rometty, CEO of IBM, expects the enterprise cloud business opportunity to be worth USD 1 trillion by 2020. Through the Red Hat acquisition, IBM aims to further solidify its position in the lucrative cloud market.
Red Hat’s OpenStack platform is a one stop shop for developing and orchestrating clouds. Hence, IBM, with the acquisition of Red Hat, will have a direct impact on a few high growth and niche markets, such as Multi-Cloud Management, Hybrid Cloud, OpenStack Service, Cloud Orchestration, and Cloud Migration. The figure shows the current market opportunity of Multi-Cloud Management along with the future opportunity and growth rate. Also, a few auxiliary markets, such as microservices and containers as a service, will get a boost in the coming years.
Impact of IBM and Red Hat Combination on Top Competitors
The global cloud marketspace has witnessed disruptions through a flurry of strategic deals among its major players. The following infographic depicts key recent developments by IBM’s competitors:
Source: MarketsandMarkets Analysis
Microsoft, for example, has recently completed the USD 7.5-billion acquisition of GitHub to strengthen its Azure cloud services by offering its developers GitHub’s open source development platform. Closely following Microsoft’s strategic move, IBM has announced the multi-billion dollar deal to acquire Red Hat, a global leader in open source software. The deal is expected to reshape the cloud marketspace, as the combined expertise and experience of IBM and Red Hat will give stiff competition to major vendors, such as AWS, Microsoft, Google, and Alibaba.
The incumbent leaders, such as IBM, in the tech landscape are adopting organic and inorganic growth strategies to gain scale and fend off competition. IBM’s expertise lies in legacy applications, and the IT transformation has been a challenge for them in the recent past. The availability of open source, which is the future of technology, can help the company subsist in the transformation journey and remove legacy barriers. The combination of IBM and Red Hat makes a strong case for organizations to choose it as their preferred technology partner in the hybrid cloud environment.