In late October of 2018, IBM announced that it would purchase Red Hat for $34B, IBM’s largest acquisition ever, and the largest deal in the history of open source. This purchase makes IBM the steward of the world’s largest open-source software portfolio.

In its announcement, IBM was not cagey about the impacts it expects from this purchase. IBM Chairman, President, and Chief Executive Officer Ginni Rometty said, “The acquisition of Red Hat is a game-changer. It changes everything about the cloud market. IBM will become the world’s #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”

While IBM naturally has high hopes and expectations for its acquisition—at $34B, it had better be a game-changer—the tech press was more measured. It saw the purchase as a roll of the dice by Big Blue, which had fallen far behind Amazon Web Services (AWS), Microsoft Azure, and Google Cloud in the hybrid-cloud space. One comment from a Reuters article is representative: “IBM is hoping the deal will help it catch up with Amazon.com Inc, Alphabet Inc and Microsoft in the rapidly growing cloud business.” To be blunt, IBM wants a bigger piece of the hybrid-cloud pie, which is estimated at $1T by 2020.

Open-source purists will continue to fret about the purchase and what it means for open source, but Red Hat leaders are not concerned. “We’re not an open source company,” said Red Hat Executive Vice President and President of Products and Technologies, Paul Cormier. “We’re an enterprise software company with an open source development model.” (Source.) And IBM has long been a responsible steward and supporter of open-source projects, including Linux. Furthermore, IBM has stated that it intends to preserve the Red Hat brand and culture, letting it operate as its own business unit within IBM’s Hybrid Cloud unit. We see little reason for concern.

What’s the Outlook Three Months Later?

The deal won’t even close until the second half of 2019, so it’s too early to make many firm predictions. But already, news from Red Hat is fodder for analysts who are watching the two companies’ engagement with interest. Market watchers note that IBM’s stock price fell after the announcement, while a ZDNet article makes hay of Red Hat’s Q3 earnings report. The article points out that Red Hat is seeing softer sales, relative to Wall Street expectations, as it prepares to become part of IBM. It goes on to state that the “sales miss is worth watching given IBM has so much riding on the Red Hat purchase.”

Again, Red Hat itself was not rattled by the news. Quite the contrary, as CEO Jim Whitehurst talked up other performance indicators:

  • Red Hat closed 100 deals worth more than $1 million.
  • Red Hat OpenShift and Ansible Automation both added more than 100 customers in the third quarter.
  • The company’s top 25 deals renewing in the third quarter renewed at an upsell rate of 120 percent.
  • Subscription revenue in the third quarter was 87 percent of the total.

Meanwhile, Red Hat has been hit with two lawsuits aimed at the merger, which claim that the company did not provide shareholders with necessary financial information to evaluate the deal.

Even if you dread the acquisition of Red Hat by Big Blue, you must admit that the purchase (and others in 2018) signals the coming of age of open-source software. Large players including IBM, Microsoft, and Salesforce, with their purchases of open-source companies, are playing to developers, who love open-source software. In fact, according to a SiliconANGLE article, “a large number of applications now include more open source than proprietary code, with one report showing 96 percent containing open-source elements.” Large companies are acknowledging that they see open source as a core part of how companies will make software in the future. It is a trend worth watching.

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