Unpacking the IBM Red Hat Conundrum

IBM just closed the massive $34 billion acquisition of Red Hat and is about to announce their first quarter of earnings post-close. Beyond the fact that IBM overpaid for Red Hat, now it must produce to make up the gap. We could debate whether the amount was a strategic move to take Red Hat off the market for other suitors while at the same time providing IBM the cloud future it desperately needs. But the core issue now is really how Red Hat will impact IBM both strategically and financially.

CLOUD IS THE FUTURE

IBM’s core is hardware and services. It starts with the mainframe and moves to their services business. While IBM’s storied businesses in both hardware and services are legendary, IBM has struggled to embrace the future of the enterprise.

IBM has had a few missed attempts at both hosted services and cloud. During the same time, enterprises were looking for guidance on where to go and how best to leverage these new methodologies. Unfortunately, the IBM cloud story has since faded into the background and IBM needed a way to bring it back front and center.

Enter Red Hat. Red Hat presented an interesting opportunity for IBM to potentially catapult their position in cloud. Historically, IBM has not had a good track record at execution of a futuristic vision of integrating new cultures, future strategies and innovation. Over the years, IBM has made a number of great strides only to watch them settle into a lower orbit. Good examples of this are SoftLayer, Blue Box and IBM Watson. All of these should have presented a strong future opportunity for IBM only to see each eventually lose momentum and their shine rub off.

During the same time, enterprise demand for cloud has grown exponentially. The Red Hat acquisition presents a lot of potential for exsiting IBM and Red Hat customers as well as net-new enterprise customers. Multi-cloud is one example of where Red Hat could make a splash and differentiate themselves. As multi-cloud is a reality for enterprises, they need a way to better manage their consumption and management of resources. The combination of containers, Kubernetes, orchestration, automation and management is frankly overwhelming to enterprises in a multi-cloud world.

IMPACT OF RED HAT OPENSHIFT

Red Hat’s Open Shift platform presents a clever solution to the cloud complexity facing enterprises in a multi-cloud world. Open Shift offers the cohesion across cloud providers while allowing enterprises to start to abstract themselves from the individual nuances each provider presents.

The real question facing IBM and Red Hat is: Can they get traction fast enough in a meaningful way to satisfy investors? While IBM’s base of customers is a huge opportunity for Red Hat, IBM’s culture will present friction to successful partnering between IBM & Red Hat in accounts. For non-IBM customers, enterprises may be put off if IBM brings a classic approach to new prospects.

As if that were not enough, time is not IBM nor Red Hat’s friend. Competing solutions are already in the works and ready to pounce on the multi-cloud problem. In many ways, it will come down to a race to domination as a fractured marketplace is not helpful in a consolidating world.

A CIO PERSPECTIVE

So, where do you go from here? If you are an existing IBM customer, you probably see the Red Hat acquisition as a great solution to some of your challenges. If you are not an existing IBM customer, you may see this as a deterrent.

The challenge for both IBM and Red Hat is to take a serious look at what makes of them stronger together and focus on those aspects. IBM’s culture will need to change to address the changing enterprise demand. Red Hat will need to leverage the good parts that IBM brings beyond their base of customers. At the same time, IBM will need to provide Red Hat with the flexibility to spread their wings without stifling their potential.

Only time will tell how this plays out. And they don’t have a lot of time to work with. If history is an indicator, this will not end well. Maybe Red Hat can finally change what has needed to change within IBM so they and their customers succeed. The $34 billion price tag sure puts a lot of pressure on the respective leadership teams to take the dramatic changes that IBM has needed to make for a long time.