Purple Reign: Five ways to look at IBM buying Red Hat

IBM-Red Hat has a fair chance of success if the latter's culture is maintained

Having spent decades writing about the fallout of enterprise technology mergers and acquisitions I think I can say, with expert confidence, that nobody ever calls these things correctly. A long-held tradition calls for rapid analysis, a glance at stock price movements, a weak pun on the potential new name for the company, a quick call around of the usual suspects, maybe an off-the-record chat with folks with an axe to grind and a hasty conclusion that the result will be either disastrous or epoch making. With that in mind, I've held back commenting on IBM agreeing to buy Red Hat… until now.

Bitter experience has taught me the fraught dangers involved in bold analysis or confident prognostication, for your reporter is the man who once considered Apple "finished" and tipped you off that Amazon's Kindle was a "crummy e-book format". So I have waited and bided my time and only now sagely bring you the artfully back-covering five possible ways to look at IBM buying Red Hat.

 

Blue and Red: The odd couple

On the face of it these are very different companies and cleverly combining Big Blue and Red Hat to make a beautiful purple rather than some murky combination is the big task.

The challenge here isn't so much about the ‘commercial code versus open source' dilemma. IBM has a long history of dealing in Linux and open source software and the Red Hat EMEA boss Werner Knoblich in 2010 told me that IBM had a strong relationship with his company in Unix-to-Linux platform shifts. It's not even a deal-breaker that in areas such as middleware the pair are competitors; there's room for plenty of SKUs there. But what's more contentious is the cultural element.

Current Red Hat CEO Jim Whitehurst wrote a book called The Open Organization (I reviewed it here) about his company's unusually democratic, pluralist and participative approach to operations and strategy; IBM has, by all accounts, a more traditional model. Managing that combination of styles will surely act as the keys to success.

 

The price was high

Nothing to do with F. Scott Fitzgerald's famous eponymous line but $34bn is a staggering sum for a company that does about $3bn in annual revenues. Some describe this as the biggest software deal ever but Red Hat is far from being a purely software concern, as former CEO Matthew Szulik was always at pains to point out. It's the combination of taking open source code and wrapping it in a service and support layer to make it palatable to business IT that has made Red Hat what it is today. And it is the opportunity to handle burgeoning hybrid cloud adoption across enterprises where IBM sees vistas of opportunity. But the hefty premium on Red Hat's share price suggests that the fat price was needed to sweeten the deal.

 

Whitehurst's golden run

Former Red Hat CEO Matthew Szulik enjoyed a terrific tenure at the newly public company but his successor has taken it to a new level. In 2007, Jim Whitehurst was COO of Delta Air Lines who was interviewed over cups of coffee that Szulik couldn't find the change for, leaving the candidate to pay and wonder whether he was being set up for an elaborate prank.

That inauspicious start didn't stop Whitehurst taking Red Hat on another golden run, multiplying revenues, profits and market cap despite having no playbook to crib from. Both Szulik and Whitehurst are likeable figures who share the quality of a fully developed sense of humor, a department all too often lacking in CEOs. That humor is presumably needed to maintain the unique needs of an open source company where ethics, communications and egalitarianism are key. But will Whitehurst stay for long? Perhaps, and the incentive might be to become the anointed successor to current IBM CEOP Ginni Rometty.

 

Don't forget middleware

A common misconception about Red Hat is that it is ‘the Linux company' or the "Kleenex brand for Linux" as Whitehurst has put it. That's understandable: Red Hat Enterprise Linux is the distribution that de-fanged Linux and made it applicable for important business workloads at some of the world's biggest companies. But Red Hat is about more than operating systems and middleware, where JBoss, OpenShift, mobile and other elements have given Red Hat enormous influence in large enterprise accounts, is a big part of the reason for IBM's interest.

Add Red Hat's participation in OpenStack for cloud management and you start to see a company with a stack that is complementary to IBM's huge database and consulting services businesses. Yes, there will be clashes, but the expanded portfolio will help IBM in its eternal mission to be at the beating heart of big business infrastructure and operations.

As Red Hat solution architect Erica Langhi once told me, "It's crucial to grow into new sectors and not only [be seen] as the Linux company."

And as Jonathan Palmer, CEO of consulting company Cloud Digital, said: "The Red Hat proposed acquisition by IBM is interesting in the fact that a large established technology company like IBM is waking up to the fact that hybrid cloud environments are the future.  Red Hat's OpenShift will help IBM leverage its overall cloud strategy [and] the fact that Red Hat's technology is embedded in so many organizations which are not natural IBM clients will take IBM in a very different strategic direction."

 

Open source is up for sale (and it's not even a story anymore)

In the 1990s when open source software first appeared in the sights of many IT departments there was debate about the responses of the big traditional players. Would they spread FUD, would they tentatively embrace the model and would they attempt to buy up the newbies? The answer to this was threefold: ‘yes', ‘yes' and ‘heck, yes'. However, it has been a long road and 11 years ago I suggested that if it were a traditional software firm Red Hat would be an obvious IBM target but its roots made this unlikely at that time.

Times have moved on a lot since then and 2018 has been a banner year for open source industry sales with Salresforce.com picking up integration firm MuleSoft, Microsoft laying mitts on GitHub to boost its developer power, EQT buying SUSE, Cloudera combining with HortonWorks and then the motherlode that is IBM-Red Hat. Today, open source is coalescing into the corpus of many so-called traditional firms and the old commercial/open source face-off is largely irrelevant.

 

So will it work? IBM has a fairly strong record of making M&A work but this is its biggest deal and its biggest challenge yet. A critical sign is that it has said Red Hat will operate as its own fiefdom but one that has access to the global reach of IBM. If it can resist the temptation to tinker then its consulting army might make something huge out of its latest asset, especially in managing the move to a future hybrid cloud-dominated IT world where IBM calculates, firms are only a fifth of their way through their transformational journeys. But this is a deal that will be heavily dependent on maintaining Red Hat's culture; mess with that and bad things will happen.