Alyson Behr - December 20, 2018

IBM’s acquisition of Red Hat: business (booming) as usual for SaaS


Public cloud Software as a Service (SaaS) revenue worldwide is forecast to top $87B in 2019 and reach $117B in 2021, according to Gartner Research. It’s expected to reach 45 percent of the total application software spending by 2021. According to Sid Nag, research director at Gartner, “In many areas, SaaS has become the preferred delivery model. Now SaaS users are increasingly demanding more purpose-built offerings engineered to deliver specific business outcomes.”

IBM’s recent $34 billion cash acquisition of Red Hat, the leading open source software and cloud services company, and leading cloud service operating system provider, will likely be a good thing for the multi-cloud sector including SaaS.

Here to stay

In the enterprise, SaaS coexists in a multi-cloud environment. Separate clouds are needed for serving services (SaaS), infrastructure (IaaS), and applications development (PaaS). IBM's publicly stated view is that multi-cloud is indeed a real thing, that major enterprises it works with use multiple cloud setups in parallel, meaning fully private, fully public, and various hybrids. According to IBM execs public messaging, their clients want to be able to run what they want to run, access the data they want to access, govern that data, and whatever else; wherever it is.

In turn, Red Hat’s role in the software-defined telecommunications industry for developing cloud-native open networks has been central. Multiple clouds and heterogeneous telecommunication networks are key to the business growth models of the IT/Communications industry moving forward thanks to enabling technologies like 5G, edge computing, IoT, and analytics. A new class of players has figured out how to make the best of multi-cloud resources, separately and together, to generate new services and revenues, so this will accelerate the trend.

IBM Senior Vice President of Hybrid Cloud Arvind Krishna and Red Hat Executive Vice President and President of Products and Technologies Paul Cormier said in a recent webcast that Red Hat's existing partnerships with other cloud providers and its open source development projects like Red Hat Enterprise Linux and the OpenStack cloud computing platform will press on. Krishna said that IBM would continue its partnerships with other Linux distributions as well. Moving forward, IBM intends to maintain a “business as usual” posture which suggests analysts growth statistics for SaaS will remain intact for the future.

What’s in it for IBM and Red Hat

IBM and Red Hat have been longtime friends, porting Red Hat Enterprise Linux (RHEL) to IBM’s mainframe platforms. According to Krishna, RHEL is the top operating system on IBM's z System mainframes, due mainly from customer demand to run services RHEL supports in a mainframe environment.

Red Hat's culture has shifted away from being a commodity Linux distribution toward IBM's corporate culture. Cormier said, “We're not an open source company. We’re an enterprise software company with an open source development model. Red Hat's secret sauce is we've put those two things together.” For Red Hat, going forward, its acquisition is going to be about increasing reach. Cormier forecasts the company will scale at greater speed, not just from a Kubernetes perspective, but with the RHEL base as well.

For IBM, last month’s acquisition is about growing IBM's business in the cloud based on its position as the open source and open standards vendor as opposed to proprietary vendors like Microsoft or Amazon and others.

The logic is there, however, according to a KPMG study, "83% of all mergers and acquisitions (M&As) failed to produce any benefit for the shareholders and over half actually destroyed value.” KPMG interviewed over 100 senior executives involved in 700 deals over a two-year period that showed the major cause for failure are the people and cultural differences. These more intangible issues may be difficult to overcome given the differences that exist between these two particular entities. But for now, this remains to be seen and it appears October’s deal will be a win/win for everyone.

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