Looking at the $ 34 billion that the IBM Red Hat Agreement announced yesterday, if you follow the company closely,…
Looking at the $ 34 billion that the IBM Red Hat Agreement announced yesterday, if you follow the company closely, it seems like a good move, at least in your face. It may be years before we understand the true value of that for IBM (or lack of it, depending on how it lasts). The questions are then, this is a knowledgeable move, a desperate or maybe a piece of both. It turns out that it depends on who you ask.
To begin with, there is the big sum of money, a premium of 63 percent on Friday’s closing price of almost $ 117 per share. IBM spent $ 190 per share, but as Ray Wang, founder and chief analyst at Constellation Research, said that Red Hat would not necessarily sell, so IBM had to pay to get its business.
Wang sees clouds, Linux and security as the big drivers on IBM’s part. “IBM doubles down on the cloud, but they also go to grips with Linux for its biggest and most important open source communities and some of the newer technologies on Red Hat security,” he told TechCrunch. He acknowledges that it is a big prize for the share, but he believes that IBM needs the M & A measure to curb customer purchase costs and drive cross-selling.
IBM puts a big bet here, said Dharmesh Thakker, General Partner at Battery Ventures, believes it’s worth 30x its current performance over the next 12 months. “It’s amazing that the hybridization capabilities we’ve been working in recent years are right and IBM / Cisco / HP / Dell wants everyone to have part of this action, as $ 300B in data center spending is lost by the public and hybrid cloud providers,” explained Thakker in a statement.
He believes that this deal could actually trigger a new set of mega fusion between traditional technology providers and cloud native, container and DevOps companies in the next few months.
IBM CEO Ginni Rometty was positively mad at the prospect of a combined IBM Red Hat in an interview with analysts and pressed this morning and pointed out that only 20 percent of the company’s workloads have moved to the cloud. She sees a great opportunity, one she is projecting to host $ 1 billion by 2020. Given that you should take market prospects with salt grains, it is undoubtedly a big market and one that Oracle and Microsoft have been targeting.
She said that Red Hat was really a rare company. “Red Hat in itself has been a valuable company and has done a good job of strong growth, is very profitable and generates money. There are not many companies out there that look in this area,” said Rometty.
Dan Scholnick, a general partner at Trinity Ventures, whose investments have included New Relic and Docker, were not terribly impressed with the deal and thought it was desperate for IBM’s part.
“IBM is a declining company like something Ways need to be relevant during the cloud. Red Hat is not the answer. Red Hat’s business centers around an operating system, which is a layer of technology stack that has come fully commoditized by the cloud. (If you use AWS, you can get the Amazon OS free, why would you pay Red Hat?) Red Hat has no history for the cloud, “he claimed in a statement.
That may not be a fair judgment. Enterprise Linux is a major part of the company’s revenue, it’s not the only part. Over the past few years, it has moved into Kubernetes and containerization and has grown the integration side of the business next to RHEL.
In fact, Forrester analyst Dave Bartoletti sees the cloud as a key here. “The combined company has a leading Kubernetes and container-based cloud-based development platform, and a much wider open source middleware and developer tool portfolio than any company separately. While an acquisition of this size will take time to play, the combined company will surely transform the open source and cloud platform market in the next few years, he says.
Wang believes that the deal could depend on how long Red Hat CEO Jim Whitehurst, who had led the company for over a decade, stayed at the unit. According to IBM, they will retain the Red Hat brand and operate it as an independent entity within Big Blue. “If Whitehurst does not hold on for a while, the deal can go south,” he said. But the company could hide the CEO’s job when Rometty decides to leave as an incentive to stay.
Regardless, Wall Street was not completely satisfied with IBM’s move with its shares throughout the day. It does not have to be said that the 63 percent premium paid by IBM for the share has pushed Red Hat higher today.
The deal must pass shareholders’ samples, but considering the premium offered by IBM, it’s hard to believe they would put it down. In addition, since these companies operate worldwide, they are the subject of the global legislative approval process. They will not officially come together until at least the second half of next year. That’s when we can start to learn if this was a brilliant or desperate move by IBM.