Linux open source brother Red Hat has been acquired by IBM for US$34 billion

The acquisition of Red Hat for US$34 billion has become the largest gamble in the history of the "century-old company" IBM. Facing strong competitors such as Amazon, Microsoft, and Alibaba, IBM chose Red Hat as its trump card. Can IBM win this "turnover battle" in cloud computing?

With the US$34 billion acquisition of Red Hat, Big Blue is expanding its territory in the open source world.

On July 9, IBM announced the completion of the acquisition of all issued and outstanding common shares of Red Hat for $190 per share in cash, with a total equity value of approximately $34 billion.

This transaction is also IBM's largest acquisition to date, and it can also be ranked among the top in U.S. history.

After the acquisition, Red Hat will operate as an independent business unit of IBM and will be included in the financial statements of IBM's cloud computing and cognitive software business. IBM is committed to maintaining Red Hat's open source legacy of independence and neutrality.

IBM said this is a landmark acquisition that will define the future of open hybrid cloud. IBM and Red Hat will jointly launch the next generation hybrid multi-cloud platform.

The rise of the public cloud is changing the open source software market. Dr. Chen Xu, Alibaba Cloud Intelligent Technology Strategic Architect, believes that public cloud vendors are becoming leaders in open source. Open source is not a zero-sum game. The rapid development of public cloud vendors is not an obstacle to open source, but can also promote the rapid growth of open source software companies.

So traditional IT companies are eyeing the fertile land of open source. Following Microsoft's successful acquisition of GitHub for US$7.5 billion, the blue giant IBM used the price of "34 billion" to convey its iron-clad determination to acquire Red Hat, the "biggest brother" in the open source industry.

As early as October last year, IBM claimed that it would acquire all Red Hat shares in cash at a price of US$190 per share (equivalent to a 63% premium). IBM will maintain Red Hat's headquarters in Raleigh, North Carolina, as well as its facilities, brands and practices, and Red Hat will become part of IBM Hybrid Cloud and operate as an independent division within IBM.

Red Hat’s existing management team remains in place, and CEO Jim Whitehurst joins IBM, reporting directly to IBM CEO Ginni Rometty. Rometty also promised not to cut staff or cut budgets.

As soon as the news came out, S&P Global Ratings immediately downgraded IBM's rating from "A" to "A" and predicted that after the transaction is completed, IBM's debt leverage will be 1 times from September 30, 2018. Increased to about 2.4 times.

After more than eight months since the announcement on October 28 last year, IBM has finally completed the acquisition; at the same time, IBM closed at $139.33, down 0.9%.

This transaction is the biggest gamble in the history of the "century-old company" IBM! It is destined to be written into the history of IBM and the open source industry.

Why Red Hat? Why is Red Hat so valuable?

First of all, let’s briefly review the history of Red Hat:

Red Hat was established in 1993. Revenue relies primarily on providing telephone support to customers. Later, it turned to the business model of "providing enterprise customers with solutions based on open source technology and providing software for free"

In 2012, Red Hat's revenue exceeded US$1 billion, unrivaled in the open source industry

In 2014, it accounted for 60% of the Linux enterprise market share; nearly 6,500 employees worldwide, with annual revenue of nearly 1.6 billion US dollars

In 2016, Red Hat’s revenue reached 2 billion

2019 In 2017, Red Hat achieved 66 consecutive quarters of profitability

Red Hat is an open source solutions provider that has gained significant influence by contributing to the open source community. Extract the upstream technology products of the open source community, test them, integrate and package them, and finally sell a complete solution to corporate users for support service fees. The software is basically free.

According to the 2019 second fiscal quarter financial report, Red Hat achieved revenue of US$823 million in the quarter, a year-on-year increase of 14%, and has achieved 66 quarters of uninterrupted revenue growth. It can be said that the business model based on open source created by Red Hat is by far the most successful and difficult to imitate.

Let’s look back at IBM. IBM's revenue has been declining since 2012. The financial report for the third fiscal quarter of fiscal year 2018 showed that revenue fell by 2% year-on-year and profit fell by 1% year-on-year.

It is also since 2012 that IBM CEO Ginni Rometty has been pulling IBM away from traditional hardware products and focusing on the cloud.

While overall revenue is declining, revenue from the cloud business segment is growing rapidly. Since 2013, cloud revenue has accounted for 25% of total revenue, a proportion that has increased 6 times! Cloud revenue exceeded US$19 billion in the first quarter of fiscal year 2019.

Faced with strong competitors such as Amazon, Microsoft, Google, and Alibaba, IBM needs a trump card, and what they are looking for is Red Hat.

Rometty told the media that the acquisition of Red Hat meets the hopes of IBM customers and can help the company move critical work to the cloud. Red Hat will provide a next-generation hybrid multi-cloud platform based on open source technologies such as Linux and Kubernetes.

There is no need to reinvent the wheel or consider cross-platform. Customers can use a mix of public cloud and private cloud applications and reach any cloud directly through one platform.

IBM said that Red Hat will continue to "build and expand its partnerships, including with major cloud providers such as Amazon AWS, Microsoft Azure, Google Cloud and Alibaba, etc." and expects Red Hat will contribute approximately two points of compound annual revenue growth over five years.

Cultural genes may be mutually exclusive and may be the biggest risk

Although IBM claimed after acquiring Red Hat that Red Hat could still maintain its original genes and operate as an independent department. However, given the lessons learned from SUSE’s four changes of ownership, it remains to be seen what the final effect of the merger between IBM and Red Hat will be.

Industry insiders believe that the biggest risk lies in cultural friction. The corporate cultures of IBM and Red Hat are completely different.

Jason Bloomberg, a Forbes commentator and president of ZapThink, believes that IBM’s culture is too focused on profits and has long been performance-focused while ignoring things more important than profits; while Red Hat’s culture is quite different. , focusing on open source and openness in various forms.

He believes that if this key gene of Red Hat culture can be transmitted to IBM, then the merged company will have hope. To this end, he also gave three suggestions:

The first step: Abandon all WebSphere products

The second step: Rename the company

The third step: Also The most difficult move is to adopt Red Hat culture, at least in IBM's software organization

In the past 20 years, IBM has invested heavily in Linux, and the ecosystem may change

This acquisition first affects the Linux ecosystem System has a huge impact.

Red Hat is an enthusiastic supporter of several major Linux projects, playing an important role in the development of Libre Office and GNOME, as well as the kernel itself. In 2016, Red Hat was the second-largest contributor to the Linux kernel project, behind Intel.

Over the past 25 years, Red Hat has invested heavily in a variety of enterprise-facing technologies, ranging from containers to serverless computing, storage and big data file systems. With this acquisition, IBM is going all out to gain a foothold in these areas.

Historically, IBM has also been a staunch supporter of Linux-related projects. IBM first announced support for the free operating system in 1999, at a time when Microsoft Windows was gaining steam on desktops and servers and Linux was nowhere near the maturity it is today.

In 2008, IBM employed approximately 600 developers working on more than 100 Linux projects, including Xen, the Linux tool chain, Apache, Eclipse and the Linux kernel project itself, and all modern IBM systems Support for Linux, more than 500 IBM software products run natively on Linux.

In short, Linux has been the lifeblood of IBM for a long time. Over the past 19 years, the company has spent millions, if not billions, of dollars supporting the Linux ecosystem through financial donations and developer offerings.

It is undeniable that IBM has had a positive impact on Linux. Going forward, time will tell what this acquisition means for IBM, Red Hat, and the broader Linux ecosystem.

In the battle to turn over the cloud computing market, IBM is surrounded by opponents

This acquisition may be the most correct decision IBM has ever made.

In the past ten years, IBM has been studying artificial intelligence and blockchain technology, but it has not shown many results so far. IBM's Watson was reported to be providing "unsafe and incorrect" cancer treatment recommendations to clinicians. The Watson Health department also laid off 50% to 70% of its staff, and the heavily invested blockchain business did not see more returns. .

Now, IBM is returning to its traditional field-enterprise services. This is a very correct decision.

IBM, which has a market capitalization of $114 billion, has seen revenue fall by nearly a quarter since Rometty became CEO in 2012. While some of this is due to divestitures, much of it comes from declining sales of existing hardware, software and services products.

The 107-year-old blue giant has been working hard to compete with young technology companies, and the most important battleground is cloud computing.

In the U.S. cloud computing market, Amazon AWS, Microsoft Azure and Google Cloud occupy the top three in the market, while IBM occupies a small share. According to the public cloud data in major global regions in the first quarter of 2018 released by Synergy Research, a U.S. market research organization Vendor rankings show that AWS alone occupies nearly 40% of the market share, and Amazon AWS, Microsoft Azure and Google Cloud together account for more than 60% of the market share.

IBM is under a lot of pressure.

Bloomberg mentioned in a comment that IBM and Red Hat will adopt hybrid cloud technology, which is a cloud computing method that integrates company computer data with its own data center. However, whether hybrid cloud computing Will it prove to be an enduring technology? The combined IBM and Red Hat will need to make a strong case for why companies should choose them instead of trusting Microsoft, Oracle or others who also adopt hybrid cloud?

Yes For IBM, it is not easy to make a comeback in the cloud computing market.