IBM to buy RedHat for $33.4 billion to enhance its cloud, infrastructure software and Open Source businesses

IBM announced its intension to acquire RedHat for $33 billion yesterday – I contrast IBM software revenues with RedHat in the Figure, demonstrating how much smaller the latter is than the former. It makes good sense today – enabling IBM to integrate enterprise-ready Open Source code and services into its cloud and on premise portfolio and RedHat’s influence to grow internationally. Associating key infrastructure software companies with larger suppliers is a modern component of the IT market; There are many ways IBM can integrate RedHat into its business; I believe it should be aiming at something relatively loose, more akin to VMware’s role within Dell EMC rather than Simplivity’s within HPE.

The cloud services market is currently out-growing all other areas of the enterprise IT market and driving strong sales growth for relevant Infrastructure software companies. My Figure shows my sizing of this business for both IBM and RedHat, showing that in this areas the two companies are peers. As joint leader with Amazon in cloud service IBM will be able to use some of RedHat’s technology and expertise to improve the plumbing in its cloud data centers, continue to sell its Open Source-based products, as well as in helping its major customers to deploy hybrid multi-cloud infrastructure. IBM and RedHat have been partners since the latter was founded in 1993.

When acquiring companies IBM is keen to enable sales expansion through its (usually) much-wider sales offices around the world. In the case of RedHat it should help in expand its international business, which is weaker than IBM’s in Asia Pacific and EMEA – although to a lesser extent.

If RedHat’s infrastructure software revenues over the last year are counted with IBM’s for the year to the end of June the combined company would have been the third largest in this $196b market (see my Figure). Of course it’s likely that the revenues of the two will be lower once combined – one and one hardly ever equals two when it comes to M&A activity.

It’s a very positive move for IBM, which already understands more than any of the other traditional enterprise IT suppliers about how to make money from cloud computing. It’s less exciting for RedHat’s staff, for whom independence made their company different; let’s hope IBM allows the offices, products and Open Source activities to flourish within its much larger organisation.