IBM acquires Red Hat, but what does that mean?

Key Analyst: Jay Lyman, Principal Analyst, Cloud Native and DevOps

Earlier this week, IBM announced its intent to acquire Red Hat for $33.4 billion, causing quite a buzz across the entire enterprise IT industry. That makes sense, given that the deal represents one of the industry’s biggest software acquisitions to date, IBM’s largest acquisition to date and considering the repercussions for key segments including cloud computing, hybrid cloud, automation and DevOps, containers and Kubernetes.

It feels like the end of an era in addition to the end of the road with Red Hat’s acquisition. This open source software pioneer helped force the enterprise IT industry, including software giants such as Microsoft and VMware, to take open source seriously. IBM acquiring Red Hat marks the beginning of the new age of open source – one populated by established giants and newer open source endeavors such as the dozens of projects that surround and support Kubernetes. That new age is also all about hybrid cloud and cloud-native applications. From a technology M&A standpoint, at $33.4 billion this acquisition marks the largest software transaction we’ve tracked since 2002 – which is impressive and validates the importance and prominence of open source software in the enterprise IT industry.

The deal is also very much about hybrid cloud. According to our Voice of the Enterprise: Cloud Hosting and Managed Services – Budgets and Outlook survey from earlier this year, 58% of respondents cited their organization is pursuing a hybrid strategy. Almost half (46%) of respondents said they expect their businesses to increase vendor spending to spread out more across vendors, either new or existing, as part of their hybrid strategy. IBM and other major public cloud providers like AWS, Microsoft and Google have also broadened their reach in hybrid cloud, but it has been limited mainly to their own clouds integrating with on-premises environments. In IBM’s case, all those public cloud players are already key partners and integrations for Red Hat’s software such as RHEL and OpenShift – expanding IBM’s hybrid cloud reach even further. This deal also follows collaboration and integration that IBM and Red Hat have already accomplished on software such as Linux, OpenStack, and containers and Kubernetes.

Despite how this deal is beneficial for both companies, there is some risk. Upholding Red Hat’s culture could be a challenge during the transition, despite both companies acknowledging its importance. To maintain Red Hat’s strategy and momentum and take full advantage of it, IBM will need to maintain Red Hat’s globally distributed work force with many remote employees rather than to consolidate it. Allowing Red Hat to operate as an independent unit would prove beneficial for everyone.

The deal is also an interesting consolidation of PaaS, given IBM based its former Bluemix PaaS software – later to become its CaaS – on the open source Cloud Foundry software and Red Hat's OpenShift PaaS is based on different open source code. For a deeper analysis on the deal, current clients can check out our deal analysis in our Research Dashboard.
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