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IBM aims to boost its strategic imperatives with $34 billion acquisition of Red Hat

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IBM has announced by far the largest acquisition in its history with the acquisition of cloud and open source software vendor Red Hat.

$34 billion is several times more than IBM has previously spent on an acquisition, which indicates just how important it thinks this is to its future prosperity. Red Hat has expanded from a developer of Linux-based business software to being involved in most places you might find B2B open source software, including the cloud and telecoms.

While most venerable tech companies seem to be in a constant state of so-called transformation, this has especially been the case with IBM as it seeks to replace its declining legacy businesses with shiny new ones. As a consequence it has four clear strategic imperatives in the form of cloud, security, analytics and mobile, revenue from which recently overtook legacy stuff for the first time.

But IBM has apparently decided this organic transformation isn’t happening quickly enough and has decided a nice, juicy bit of M&A is required to hasten the process. Most reports are focusing on how Red Hat will contribute to IBM’s hybrid cloud efforts, and thus give it a boost in competing with the likes of Amazon, but Red Hat’s activities in the telco cloud specifically shouldn’t be underplayed.

“The acquisition of Red Hat is a game-changer,” hyperbolised IBM Dictator (Chairman, President and CEO) Ginni Rometty. “It changes everything about the cloud market. IBM will become the world’s number one hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.

“Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs,” she said. “The next 80 percent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales.”

IBM Red Hat Rometty Whitehurst cropped

“Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise,” said Jim Whitehurst, President and CEO, Red Hat (pictured, with Rometty). “Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience –  all while preserving our unique culture and unwavering commitment to open source innovation.”

Cloud and open source have been major themes in the tech M&A scene recently. Microsoft continued its transition from closed software box-shifter with the recent $7.5 billion acquisition of code sharing platform GitHub. Meanwhile open source big data vendors Cloudera and Hortonworks have decided to merge and earlier this year Salsforce dropped $6.5 billion on MuleSoft to power its Integration Cloud.

In M&A, the party line from the company being acquired is usually something along the lines of it enabling them to take the next step in its evolution thanks to the greater resources of its new parent, and this was no exception. “Powered by IBM, we can dramatically scale and accelerate what we are doing today,” said Whitehurst in his email to staff announcing the deal. “Imagine Red Hat with greater resources to grow into the opportunity ahead of us. Imagine Red Hat with the ability to invest even more and faster to accelerate open source innovation in emerging areas.” And so on.

He went on to explain that, while he will report directly to Rometty, Red Hat will continue to operate as a ‘distinct unit’, whatever that means. Usually this sort of talk is designed to sell the concept that it will remain the same company it was before the acquisition, but with loads more cash to play with. Let’s see.

IBM would be mad to mess around with Red Hat too much as it seems to be doing just fine and reported 14% revenue growth in its last quarterlies. Then again you don’t pay a 60% premium for a company just to accrue its revenue and how IBM integrates Red Hat into the rest of its offerings will be what determines the success of this bold move. There are, sadly, no signs the company plans to change its name to Big Blue Hat, which is a worrying early missed opportunity.

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