Red Hat-IBM deal closes, both promise a friendly coopetition

IBM and Red Hat formally signed off on its $34 billion deal as the combined company sets off to make its mark in the hybrid cloud market.

IBM has closed its $34 billion acquisition of Red Hat, and while executives repeated past assurances that the companies will remain separate, Big Blue intends to build products more closely on Red Hat technologies going forward.

"I think there is maybe a 5% overlap [in the companies' products]," primarily in middleware, said Arvind Krishna, senior vice president of cloud and cognitive software at IBM, in a press conference. Many clients employ products from both vendors, but for different use cases, he added. "We have to maintain both sets of products going forward."

However, "all IBM middleware products will be built to run best on OpenShift," Krishna said in reference to Red Hat's Kubernetes container-based hybrid computing platform. "Outside of that I'm not sure there is going to be a direct influence on each other."

Another analyst agreed that OpenShift will play a critical role to help IBM improve its fortunes in the cloud market.

"If you are looking for one factor that can help them win the game from an infrastructure and software perspective, it's OpenShift," said Judith Hurwitz, president of Hurwitz & Associates, a consultant firm in Needham, Mass. "It is going to be massive for them."

Judith Hurwitz, Hurwitz & AssociatesJudith Hurwitz

Red Hat's tight relationships with Microsoft and AWS can help the combined companies better compete in the cloud market. The Red Hat ecosystem built through those partnerships will be core to the Red Hat-IBM strategy, Hurwitz said.

IBM's intention to acquire Red Hat in October jolted the industry, both for its sheer size and questions it raised about how Red Hat's open source-driven culture would fare under Big Blue's ownership. Krishna and Red Hat executive vice president Paul Cormier addressed those concerns once again in the press conference.

Red Hat product teams will make decisions on their own product lines and how they contribute to open source projects, according to Krishna. "That side is easy," he said. "The real question comes down to our behavior with partners and clients."

Arvind Krishna, IBMArvind Krishna

The industry is marked by coopetition today, and IBM and Red Hat executives said they will follow that path.

For one thing, Red Hat salespeople will not get compensated on IBM products, Cormier said. The companies' channel programs are to remain separate as well, Krishna added. "We would love for every channel partner to be in both, but they're not becoming [one channel]."

Unlike previous acquisitions where IBM completely consumed the acquired company into its culture, Hurwitz believes IBM will give Red Hat ample room to operate and make tactical and strategic decisions.

"You are not going to see a 'Blue Washing' of Red Hat, where they keep the company intact for a while but already have plans to incorporate it as just another piece of IBM," she said.

Paul Cormier, Red HatPaul Cormier

IBM recognized early on that Red Hat's impartial image was crucial to grow the company's ecosystem, and the two will remain neutral as they go to market together, Cormier said.

"That independence is essential to ensure our other partners, which in some cases may be a competitor to IBM, have a fair shot at the business," he said.

The company's staff and physical assets will also be preserved and not consolidated, according to Krishna.

"This acquisition is not about cost synergies," he said. "We're not talking about layoffs. This is about growth synergies."

With hybrid cloud, Red Hat-IBM hopes for perfect storm

The Red Hat-IBM combination comes as enterprises that evaluate their on-premises and cloud options, increasingly choose both.

"We believe hybrid cloud unlocks tremendous value and is the only way forward for our clients," Krishna said. Some IT workloads will stay on site and others will go onto various clouds, and customers need a single control plane to operate it all, he said.

Moreover, the enterprise software landscape is retooling, and Red Hat has built the tools companies need to do so, Cormier said. The latest version of Red Hat Enterprise Linux (RHEL), which Red Hat released earlier this year, was designed specifically for containers and OpenShift 4, he said.

You are not going to see a 'Blue Washing' of Red Hat.
Judith HurwitzPresident, Hurwitz & Associates

IBM and Red Hat aren't the only companies eager to capture the lead in hybrid cloud. Earlier this year, Google launched Anthos, a Kubernetes-based platform that lets customers run workloads across multiple public clouds and on-premises infrastructure. Google invented Kubernetes, which has become the dominant vehicle for container workloads.

Google also has a stronger presence in public cloud than IBM, although it has yet to prove over decades that it can maintain an enterprise-class software business, as IBM already has, said Stephen O'Grady, an analyst at RedMonk in Portland, Maine.

"Portions of this are technology, but for a lot of these enterprises it comes down to trust," he said. "That's a strength [IBM and Red Hat] can certainly fall back on."

IBM's $34 billion bet now unfolds

The Red Hat-IBM deal is the largest enterprise software deal ever. While company executives have been unsurprisingly bullish on the acquisition, its price tag has drawn some skepticism.

"It gives IBM new topics to talk about, and creates a lot of revenue, but IBM may well not be able to recoup the price," said Holger Mueller, an analyst at Constellation Research in Cupertino, Calif.

While the companies insist they will remain separate, there are places where it makes sense for them to come together, on paper at least, according to O'Grady. "IBM services is an enormous organization and has had an [enterprise] account presence forever," he said. "OpenShift essentially just got an army of tens of thousands of people."

As for product overlaps and potential phase-outs, there is not much to worry about, O'Grady contended.

"If customers want to keep things and don't want to move, IBM won't force them," he said. "OpenShift is clearly more the future than WebSphere is, [but] there are easy ways for these things to coexist."

Similarly, IBM will not abandon WebSphere users, nor will Red Hat desert JBoss users who have made large financial and technical investments in those platforms.

"IBM is not going to say to WebSphere users, 'Well, we bought Red Hat and don't care about you anymore,'" Hurwitz said. "WebSphere users have embedded it in too many of their offerings."

Corporate users themselves can play an important role to make the newly combined company work more efficiently, by urging them to live up to their word and not competing against each other.

"Users will need to hold their feet to the fire," she said. "Companies will probably not need two implementations of Kubernetes, for instance, or any other core software."

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