IBM makes big play for Red Hat

The public sector market had little direct impact on IBM’s desire to buy Red Hat for $34 billion.

But the factors driving the broader technology market around cloud computing apply as much in the government market as they do in the broader commercial world.

Big Blue is making a big bet that the future of computing lies not just in the cloud but in the hybrid cloud where companies and government agencies have an infrastructure that includes on premise data centers, public cloud implementations and everything in between.

IBM is pitching to the market that no single cloud holds all the answers for large enterprises, so they have to have the tools, management skills and infrastructure to store, move, share, analyze and use data.

In the federal space, that is the stand IBM has taken for the Defense Department’ $10 billion JEDI cloud computing project. IBM's belief in the power of the hybrid-multiple cloud approach is the crux of their argument in the protest it filed over the JEDI solicitation's terms.

DOD has been steadfast in its position that a single cloud provider is the best approach for meeting its needs. But IBM and others disagree.

Oracle also has filed a protest with the Government Accountability Office and a decision is due Nov. 14. IBM’s protest decision is expected by Jan. 18.

Of course, the Red Hat deal positions IBM well beyond JEDI because as I said, the public sector market has little to do with IBM’s desire to buy the company. But the positives they see for themselves in the commercial market could apply just as well in the federal market.

So here are some deal highlights:

• IBM claims they will be the top hybrid cloud provider in a market expected to reach $1 trillion by 2020.

• IBM will maintain Red Hat’s open source legacy and it will operate as a distinct unit in IBM’s Hybrid Cloud team.

• Red Hat partnerships will continue with AWS, Microsoft Azure, Google and other cloud providers.

• Red Hat will have access to IBM’s sales infrastructure bringing it significant scale to pursue more business in the U.S. and internationally.

• Jim Whitehurst, Red Hat president and CEO, will continue to lead the business and the current management team will stay in place.

IBM sees a huge opportunity ahead. It claims that 80 percent of enterprise workloads have yet to migrate to the cloud. In the federal market that percentage is likely even higher.

It also is worth pointing out some of the financial numbers. IBM will pay $190 a share, about a 63 percent premium. This brings the deal's price tag to around $34 billion. It is expected to close in the second half of 2019.

Red Hat is growing rapidly with $3.2 billion expected in 2018 revenue, a 19 percent increase from the year before.

IBM says the deal accelerates its shift to higher value work and higher margins and increases revenue. IBM also gains access to Red Hat’s wide network of developers and accelerates the move to hybrid cloud computing.

The belief in the hybrid cloud as a growing market also fueled Hitachi Vantara's acquisition of REAN Cloud, which closed last week.

The Red Hat deal positions IBM to be a stronger competitor against AWS, Microsoft Azure and Google. In the federal space right now, that primarily means AWS and Microsoft.

IBM has struggled against those competitors with six years of declines until just recently, according to Bloomberg. So the deal does give an immediate boost to IBM’s cloud revenue.

While IBM says that Red Hat will maintain its partnerships with IBM rivals, it’ll be interesting to see how that plays out over time.

JEDI might be a test case. Red Hat Chief Financial Officer Eric Shander told the Raleigh News & Observer in late June that no matter who won JEDI, Red Hat would like to get involved in the project.

“Whether they go public or private, our software is going to work for them,” he told the newspaper. “We’re well-positioned with the products we’re talking to them about.”

The question is whether will that continue given how bitter the competition for JEDI has become.

I’ve reached out to several executives around the federal market to get their take and I’ll share those insights as they come in.