News of IBM’s acquisition of Red Hat for $34B ($190/share) hit the wires today. At $34B, its the largest software acquisition in history and represented hefty multiples of 9.2x NTM revenue and 33x NTM free cash flow. Why did IBM think this deal was worth doing and what are the ramifications going forward? Here are some preliminary thoughts:
- Openshift. IBM’s attraction to Red Hat is its Openshift software suite. Although most think of Linux when they think of Red Hat, the company has been smartly building out (and acquiring) Openshift into a functional platform for developers building containerized and orchestrated (eg, Kubernetes or k8s) cloud applications. IBM wants and really needs access to the developer community around Openshift, hence no price was too high. Despite the fact that RedHat’s traditional Linux business has been faltering – they missed earnings badly earlier this year, that didn’t matter to IBM because the value of Openshift to them is so high.
- Multi-cloud Wars. IBM is losing out in the cloud wars to AWS, Microsoft, and Google. Others are beating them as well in the cloud race including Alibaba, with its China stronghold, and Oracle, with its database franchise aiding its cloud efforts. As I’ve said previously, the mutli-cloud trend is creating massive disruption in the land of tech giants, and IBM is running out of time to get in the game. Recognizing this, there are a limited number of assets out there that could move the needle for them – Openshift is one of the few.
- Open Source Primacy. As we’ve seen with the recent Elastic IPO and the MongoDB IPO prior to that, as computing workloads are moving to the cloud, software is moving to open source. The business models around open source software are emerging, and a strategic deal of this size further validates this. I expect the valuations of cloud-focused open source companies who successfully harness developer communities to continue to surge forward.
So will this deal work for IBM? I’m somewhat skeptical. While IBM has said they’ll now offer companies “the only open cloud solution” and that this will “unlock the full value of cloud,” IBM also endeavors to gain market share in the cloud wars. This is where the real dollars are for IBM. Sure, Openshift has embraced k8s and attracted customers because of its promise of multi-cloud flexibility, but under IBM’s ownership its hard to see how developers will see Openshift as a true cloud neutral platform. That said, its a bold move. We’ll undoubtedly continue to see more strategic acquisitions and collaborations as the cloud wars continue to heat up.