When IBM paid $34 billion to acquire Red Hat in 2018, it was a big bet on a hybrid cloud future, one that appears to be paying off four years after the deal was announced. Over the last couple of quarters, IBM has produced slow but steady single-digit growth, and the positive results were led by the Red Hat business.
Both companies are running in-person conferences with their customers this week in Boston, with IBM Think and Red Hat Summit taking place at the same time.
Red Hat CEO Paul Cormier, who has been with the company for over 20 years, said IBM CEO Arvind Krishna’s plan to transform his company centered around Red Hat and a hybrid cloud strategy. The idea is for his company to use the power of IBM’s size while maintaining Red Hat’s independence.
Krishna described Red Hat as an integral part of the company.
“Red Hat is absolutely essential and core to our strategy, not just the hybrid cloud … I’ll say to our [overall] strategy. Red Hat gives us a platform on which we do two things: One, it is the base of the hybrid cloud because Red Hat runs on the public clouds and it runs on premise and on private clouds. Second, we have taken all the IBM software and optimized it for the Red Hat OpenShift platform, so now it becomes we have written things once and we can deploy them anywhere that a client wants,” Krishna said in a press roundtable yesterday. (OpenShift is RedHat’s container management platform.)
In the most recent quarterly report, IBM revenue grew 8%. That may not seem like a ton of growth, but after almost a decade of negative reports, this is what the company has been looking for. Red Hat was a leading contributor to that result with 18% growth, while the broader hybrid cloud business grew 14%, all good signs for Big Blue.
Bola Rotibi, an analyst at CCS Insight, said that Red Hat is a big part of IBM’s growth strategy and helped push the successful quarter. “Ultimately, IBM has started its fiscal year with solid first-quarter revenue growth on the back of healthy business operations across its reporting segments, but especially with respect to the company’s hybrid cloud and AI operations,” she said.
Cormier said his organization acts as the tip of the spear for IBM’s hybrid strategy. But as he has said in the past, a crucial part of this approach is letting Red Hat behave independently, and that means not playing favorites with IBM when it comes to sales or strategy.
“The way Arvind characterizes Red Hat is that IBM will be opinionated on Red Hat, but it can’t work the other way around. So what that means is IBM has completely standardized on Red Hat as the [company’s] hybrid platform,” Cormier said.
But while IBM may be faithful to only one partner, Red Hat still has the ability to play the field and stay unattached. “We have many partners besides IBM. So while they’ve standardized on us, we work with everyone, with all partners within our ecosystem, just as we did before [the sale].”
He said a good example of these partnerships working well is the public cloud. While IBM still sells public cloud infrastructure services, Red Hat has good relationships with the Big 3 — Amazon, Microsoft and Google. “We will not do anything different for IBM cloud than we do for any of them [and] would be willing to deal with any of them,” he said.
Cormier said beyond that, Red Hat does its own thing, reporting to IBM periodically on its progress. “We still run our own strategy. We run where we’re going to go, and we never, ever, ever get pushback from IBM on that,” he said.
He said he and his team sit down with IBM annually to talk about goals.
“Our numbers report up through IBM. So at the beginning of the year, I work with Arvind and Jim Kavanaugh, the CFO, and we agree on a plan for what we’re going to do for revenue, what we’re going to do for profit, and that’s where we go. Then we meet with them maybe once a month or once a quarter or so, and give them an update of where we’re going on the numbers.”
Cormier said that Krishna is effectively his chairman of the board in this scenario, and Red Hat still has to run a tight ship and meet financial goals.
“We look at Arvind as our chairman of the board, right? That’s how I look at Arvind. So we still want to live within our means,” he said.
Rotibi said that Red Hat has been a critical part of the recent growth cycle for IBM with help from IBM’s old chestnut consulting services. “In fact, growth in the company’s revenue and backlog came from strong subscriptions for the Red Hat portfolio. It also came from IBM Consulting in its advisory capacity, helping to drive increased engagements focusing on implementing Red Hat OpenShift and IBM Cloud Paks,” she said.
Not everyone is convinced, though. Holger Mueller, an analyst at Constellation Research, said the new strategy is basically an acknowledgment that the company failed at building its own cloud. He’s also not clear that the hybrid consulting business is sustainable.
“IBM basically failed at cloud as a holistic offering under [previous CEO] Ginni Rometty and needed Red Hat to remain in the game. The good news is that at the core, the multicloud value proposition is what enterprises want,” he said. “The question is, why from IBM and not the other large systems integrators?”
While he questions whether the price tag for Red Hat was worth it, he still can see the advantages of combining the two companies. “I am not sure they will ever recover the $34 billion in a hard payback, but in synergistic effect they have a shot, which is selling additional software licenses, hardware (Power) and quantum,” he said.
Red Hat didn’t come cheap, that is for sure, even compared to some of the mega-deals we’ve seen since. The acquisition gave IBM some cloud credibility it had been missing. By looking at the hybrid cloud, and by extension containerization and other cloud-native technologies, it has been able to find growth.
For now, that feels like a win, but whether Big Blue can keep it going, offering the steady high-single-digit growth Krishna is seeking, and whether it can compete with those SIs whose job has always been to deal with complex technological problems, remain open questions.
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