IBM sits draped over the bar at The Cloud or Bust saloon. In walks Red Hat

Thirsty for cloud? Let's have a drink


Will the Linux spirit survive?

As we pointed out when the story broke last night, culturally there could be some changes for Red Hat staff, and though the firm will be given some autonomy in the early days, will it last?

WSO2 CEO and director Tyler Jewell, who developed cloud workspace biz Codenvy which was bought by Red Hat in 2017, wasn't convinced.

"IBM's rich, long history and complicated organisational structure will ultimately injure what makes Red Hat special," he said. "IBM will kill the Linux spirit that lives within Red Hat."

This could open the door to Linux distributions other than CentOS, Fedora and the other free clones of RHEL to build a wider footprint in the market. Jewell has skin in the game as WSO2 claims to be the world's seventh largest pure open-source software dev.

He claimed bureaucracy at Big Blue places "fundamental orientation toward being commercial and a patent-first mindset toward software innovation". He said open source "advances" when vendors show "selflessness by investing in the upstream's goals, even if they conflict with their commercial interests".

Red Hat's policies allowed staff to comply with this ethos, and there was "no form of retribution and limited management oversight," he added.

"IBM, on the other hand, has a history of engaging with upstream projects to steer them towards corporate self-interests. Even if Red Hat is left to autonomous operation for a year, will IBM be able to resist their historical and institutional attitudes towards commercialisation for the project that Red Hat drives?"

The buy, he said, was a "disaster" for the Kubernetes and Docker communities as "important competitors with differing views will be forced to rationalise their offering". OpenShift, as such, will become the dominant brand for Kubernetes. And the buy will be a "loss" for the Java market to which IBM and Red Hat contribute.

"Their consolidation will lead to few innovations and advancements on the programming language running most enterprises around the globe," Jewell predicted, adding that the rate of innovation at both companies will slow.

"IBM's history of blue washing technology, polar opposite models, and diverse cultures will create challenges for how the two vendors rationalise overlapping, and competitive offerings in API Management, Kubernetes, containers, OpenStack, programming languages, and ESBs."

Of course, lots of people that worked on Kubernetes at Red Hat will always have the option to leave and work elsewhere. Some might feel right at home at Google. And given IBM's attitude to layoffs, if things don't work out, maybe some Red Hat staff won't have a say in the matter if it comes down to shareholder value.

The stock market seemingly hasn't itself bought into IBM's slurp of Red Hat. IBM shares fell by a couple of percentage points today when the NYSE opened. But Red Hat shares have shot up in value, by almost 50 per cent.

"The deal appears fairly expensive," said Toni Sacconaghi, partner at Wall Street analyst Bernstein. The price equates to 30 per cent of IBM's total market cap today, will dilute Big Blue's earning per share and will "only initially accelerate" revenues.

"We believe the ultimate success of IBM's acquisition of Red Hat will be predicated on the belief that large cross-sell/revenue synergies exist, or that Red Hat's cloud businesses can grow exponentially (from $550m today to several billion over time." He said the deal is "not transformational... at least initially".

It's all or nothing

Bernstein's man admired the boldness of IBM's move. However, he said the business has a "very mixed track record" with larger deals. Red Hat will be its biggest by far, with the next nearest including Weather Company for $2bn and Truven for $2.6bn.

Rival bids are seen as unlikely, he said, given that the public cloud titans "might jeopardise the company's reputation as the 'Switzerland of the IT stack'. The relatively high price of the acquisition should also dissuade further bidding."

In addition to the typical integration risks, other concerns include "weaker partner support" for Red Hat channel firm and OEMs from the new combined entity, and a quicker than expected slowing of Red Hat's historic business.

"One risk – of course – is that OEM partners push other Linux variants because Red Hat is now owned by IBM, a key competitor. Cloud partners' view of Red Hat might change given that IBM has its own IaaS and PaaS offerings.

"Clearly IBM is trying to position Red Hat as EMC did with VMware, where it will maintain its autonomy and existing partnerships... but there is a delicate balance between cross-selling and fully preserving existing partners' relationships."

A seasoned IBM watcher, Sacconaghi noted that Red Hat's deal comes seven years into IBM CEO Ginni Rometty's tenure and "it appears in part to be a concession that IBM's current strategy is not working".

CloudsBees Labourney said the transaction is a gamble IBM has to make, and "in some ways, this is IBM's last chance to matter" in the public cloud.

"If they don't they'll slowly become a big but less relevant player. This is an 'all or nothing' bet.

"The cloud is having a transformational impact on the IT market. After transforming Amazon into 'the new Amazon', and transforming Microsoft into 'the new Microsoft', it will be on IBM to prove this acquisition can transform them into 'the new IBM'."

Failure to do so could result in the slow, drawn-out destruction of two companies, or at the very least, the break-up of IBM. ®

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