Red Hat was up for sale for quite some time, according to some sources. Several potential buyers passed on the opportunity, including Google.
But not IBM.
IBM paid big bucks for the open source software solutions company. At a price tag of $33 billion. That makes Red Hat valued at one-third of IBM’s current market cap, and more than twice Big Blue’s cash chest.
What did IBM see in Red Hat that others are missing?
Simple. A strategic fit that could help the technology giant expand into emerging segments of the IT industry, and turn its fortunes around.
Specifically, Red Hat is expected to bring three things to IBM: the world’s largest portfolio of open source technology, their innovative hybrid cloud platform, and a vast open source developer community.
That’s according to a spokesperson for IBM, who explained that “IBM has been investing to lead in the emerging, high value segments of the IT industry. Red Hat represents the latest and largest move as part of that high value strategy. Together, we become the world’s leading hybrid multi-cloud provider. This is a game-changer for the cloud industry.”
Bruce Ross, group head for Technology & Operations at the Royal Bank of Canada (RBC), agrees. When it comes to the technological fit, that is.
“From a technology standpoint, this is a significant transaction that underscores IBM's commitment to open standards and the importance of a hybrid approach to cloud. From an industry point of view, the financial services sector will benefit,” says Ross. “At RBC we're focused on rapidly delivering differentiated digital experiences to our clients. The ability to move quickly and deploy business critical applications between multiple cloud environments safely and securely is a game changer that helps us achieve our mission.”
George Andreadis, adjunct professor of finance at Pace University, believes IBM and Red Hat are a good fit especially. “The cloud business is a potentially strong one for IBM, and moving into computing programs where developers run applications such as the Linux system may be that jump start that IBM needs. This open source alternative to compete with the big players such as Amazon and Google among others, may just what IBM’s needs for future growth,” Andreadis says.
But LIU POST ITRC Associate Director John-Paul McCaffrey is skeptical about the strategic fit of the two companies. “So many good things have come from open source projects,” he notes, “and Red Hat has been a long-time favorite for many Linux users.”
Meanwhile, Andreadis is concerned about the hefty price IBM pays for Red Hat. “The other side of this is that this is a hefty valuation of $34 billion over the before announcement valuation of Red Hat at $20 billion.”
And there are doubts when it comes to the impact Red Hat will have on Big Blue’s financials. While Red Hat’s revenue is growing at 13.70%, it’s a tiny fraction of IBM’s revenue—see table 1. This means that the move will barely make any immediate difference in IBM’s sales growth, something financial analysts have been following closely.
Then there are Red Hat’s EBITDA volatile margins that are below IBM’s EBITDA margins—see chart.
Table 1
| Company | Total Revenue | Qtrly Revenue Growth | Operating Margin | Employees |
| IBM | $87.57B | -2.10% | 15.4 | 366,600 |
| Red Hat | $3.16B | 13.70 | 15.73 | 11,870 |
Source: Finance.yahoo.com 10/29/2018
But things may change if the three things Red Hat bring to IBM help the technology giant compete effectively against Amazon, Google, and other competitors, over the long-term.
