With the $34 billion acquisition of software firm Red Hat – its largest in over 100 years – IBM is going all-in to boost its cloud computing business.
The U.S. tech pioneer agreed to buy Red Hat, a North Carolina-based multinational specialising in open source software, back in October 2018. IBM announced the deal’s closing on July 9. This marks a major step in IBM’s transition from its traditional hardware business to newer, fast-growing, higher-margin segments such as cloud computing and software as a service (SaaS).
Ginni Rometty, who became CEO in 2012, has led the charge. Thus far the process has not been easy, bringing with it years of revenue declines and investor discontent. Cloud revenue has been a bright spot, however, suggesting the company is on the right path. Since 2013 IBM’s cloud revenue as a percentage of its total revenue has grown six-fold, to 25%. In the 12 months through the first quarter of 2019, its cloud revenue surpassed $19 billion.
IBM’s cloud strategy is to help companies “move mission-critical work” to the cloud, Rometty said. The Red Hat deal should help it deliver on a wider scale. Rometty explained that customers want hybrid cloud applications because they “look at their IT and they say, ‘Look I can’t just throw it all out and rebuild it.’” IBM’s solution is a mix of public and private cloud applications “with one platform across it.” A hybrid approach integrates the technology with in-house IT infrastructure.
Red Hat specializes in Linux, the most widely used open-source operating system and an alternative to rivals such as Microsoft’s Windows. CEO Jim Whitehurst and his management team will remain in place, with Whitehurst joining IBM’s senior management team and reporting to Rometty. Red Hat will operate as a distinct business unit within IBM, which plans to maintain its headquarters in Raleigh, NC, as well as its facilities, brands and practices, Reuters reports.
The two companies will offer “a next-generation hybrid multi-cloud platform” based on open-source technologies. Because IBM’s hybrid cloud strategy entails integrating multiple cloud platforms, it will not compete directly with “hyperscale” providers such as Amazon Web Services (AWS), Microsoft and Google. Red Hat will continue to “build and expand its partnerships” with these and other major cloud providers, IBM said.