From red to blue: Analysts' views on IBM-Red Hat takeover

• Alliance designed to ramp up growth, battle competition
• Mixed reactions as to whether this is effective

IT WAS only three years ago that the world witnessed the world's largest takeover of an IT company when Dell Technologies paid a whopping US$64 billion (RM266.82 billion) to take over EMC Corp, in what is known as the largest IT deal ever.

Last week, the world witnessed the second largest mega-takeover in the IT world when Armonk, New York-based IBM Corp agreed to pay US$34 billion (RM141.75 billion) for Red Hat Inc or US$190 per share in cash, a 63% premium to its closing share price on Oct 26. Observers have said the deal is by far IBM’s biggest acquisition to date.

“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” said Ginni Rometty (pic, above), IBM chairman, president and chief executive officer said in a statement. “IBM will become the world’s No 1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”

Post acquisition, Red Hat will become a unit of IBM's Hybrid Cloud division while Red Hat CEO Jim Whitehurst joins IBM's senior management team, reporting directly to Rometty. Industry watchers noted that the merger may seem sudden but it has actually been in the works for some time already. The deal is expected to close after regulatory scrutiny sometime mid 2019.

IBM’s takeover of the Raleigh, North Carolina maker of open source IT software and services comes at a time when IBM is struggling with growth. Big Blue had for decades been a leader in large IT infrastructure comprising mainframes and storage gear but was slow to adapt and adopt cloud technologies, prompting analysts to warn investors about its future growth prospects.

Forrester principal analyst Dave Bartoletti said while IBM has struggled to keep up with Amazon Web Services (AWS) Inc, Microsoft Corp and Google Inc in the public cloud market, this deal gives IBM a new stronghold in the cloud development platforms market.

“The combined company has a leading Kubernetes and container-based cloud-native development platform, and a much broader open source middleware and developer tools portfolio than either company separately, he said. “While any acquisition of this size will take time to play out, the combined company will be sure to reshape the open source and cloud platforms market for years to come.”

Other analysts were similarly upbeat about the deal.

David Holt, an analyst with market research firm CFRA, said that the deal makes sense for both IBM and Red Hat since they were already big partners in consulting projects and on the Linux operating system on IBM’s mainframe computers, reports Fortune.

Holt said IBM could potentially use its large sales team and existing relationships with big businesses to sell Red Hat’s hybrid cloud technology to more customers.

And Daniel Ives of Wedbush felt the deal represents “a major shot across the bow” by IBM against top cloud players such as AWS, Microsoft Azure, and Google Cloud Platform (GCP).

“There is another player in town that plans to aggressively compete in this massive secular hybrid cloud shift,” Ives said, adding that the deal could help IBM gain market share in an industry he expects to be massive.

Meanwhile Ray Wang of Constellation Research believes Big Blue could have paid a premium price for Red Hat as the latter didn’t necessarily want to be sold.

“IBM is doubling down on the cloud, but they also are going for a grab in Linux for their largest and most important open source communities and some of the newer tech on Red Hat security,” he told TechCrunch. Wang goes on to acknowledge that it’s a huge premium for the stock, but believes IBM needs the M&A action to drive down customer acquisition costs and drive up cross sell.

BTIG cloud industry analyst Joel Fishbein however told CNBC that he believes “it's a desperate deal by IBM, which has missed the boat for the last five years.”

“I'm not surprised that they bought Red Hat, I'm surprised that it took them so long. They've been behind the cloud eight ball."

Next page: Banking on hybrid