IBM’s CEO Big Bet: Can Red Hat Deal Save Cloud Services Roads to Revenue?

Key takeaway – The Red Hat acquisition can be a win-win for IBM and CIOs’ multicloud strategies, so long as IBM resists the temptation to overload Red Hat solutions with IBM services.

IBM’s CEO Rometty acquired Red Hat Inc for $34 billion to turn around cloud computing services. This is IBM’s largest acquisition in over 100 years, according to Reuters.

IBM agreed to pay Red Hat shareholders $190 a share, or a high 63% premium over its value, as reported by Bloomberg media. IBM has had some missteps in the cloud computing execution over the last five years. It is in 4th place in cloud leadership behind Amazon AWS (1), Microsoft Azure (2), and Google Cloud (3). Oracle is quickly gaining revenue and is in 5th place with its strategy to make every application a cloud-everything services plan.

IBM and Red Hat expected outcomes:

  • IBM’s next-generation hybrid multicloud platform solutions grow revenue and maximize open-source technologies, such as Linux and Kubernetes
  • Red Hat’s business keeps building and expanding its partnerships, including major cloud providers, such as Amazon Web Services, Microsoft Azure, Google Cloud, and Alibaba.
  • Red Hat’s Enterprise Linux and OpenShift platforms grow workload portability and interoperability services across any vendor’s cloud services.

The CEO’s seven-year leadership has reshaped IBM with higher margin services such as cloud and software services, but the company stumbled out of the gate with its cloud computing services.

IBM sustained five years of revenue declines before reversing the trend in late 2018 by showing revenue growth for several quarters, according to CNBC. IBM needed a smart acquisition going forward to survive in cloud services.

IBM’s big bet with Red Hat is to drive higher profit margins in cloud and software services for a return to higher revenue growth. This CEO acquisition strategy should grow IBM’s future revenue roads under her leadership.

Does this acquisition make sense?

Both IBM and Red Hat have common tech synergies for open platforms and interoperability. Red Hat brings a plethora of go-to open-source software and services, which can augment IBM’s cloud services. IBM can play cloud catch-up with the Red Hat suite for augmenting the hottest cloud services trend with multicloud computing. The goal for the acquisition is to offer a next-generation hybrid multi-cloud platform per an IBM/Red Hat statement.

Are multicloud services the right revenue model now?

Hybrid multi-cloud platform is slightly misleading. At the beginning of cloud adoption, CIOs have seen that private and public clouds quickly transformed into the hybrid cloud using one public and private cloud for an organization. From there, cloud strategies morphed from hybrid to multicloud with any hybrid subset combination of public and private clouds. This shift quickly took hold when most software services firms had to dump their proprietary application back-ends to create cloud-computing solutions for market survival after 2016.

It’s now typical to see CIOs using a combination of private and many public clouds with the new or refreshed augmented software such as SaaS for your enterprise cloud services. Cloud services or use of multicloud incorporates all delivery and service models of cloud computing (private and public) and related solutions, such as IaaS, PaaS, and SaaS models. This shift in multicloud services is where IBM adds value. Both IBM and Red Hat solutions could be used easily in the CIO cloud integration playbooks. This acquisition should drive higher revenue margins for IBM through more IBM cloud services.

After 2016 there was a race for older software and ERP vendors to refresh their product suite to cloud-based services. As this trend is now in full force adoption, CIOs are rethinking their cloud strategies for integration, governance, and risk management plans.

After CIOs jumped to key cloud services, they discovered three new challenges:

  • Cloud services lock-in leading to increasing unbudgeted costs each year
  • Single cloud provider services risk for disaster recovery
  • Numerous software services now in cloud-based offerings needing integration

Most of these challenges can be addressed with a robust multicloud services strategy and execution plan.

Notably, one recent success of IBM’s that illustrates the potential of its multicloud strategy is a multi-billion, multi-year AT&T contract for a range of cloud solutions, other technologies, and services that included Red Hat products without specific details according to Bloomberg reporting,

Bottom Line

To re-energize its cloud services and revenue models, IBM needs Red Hat to be a rainmaker. IBM is adept at integrating hybrid and multicloud services, enterprise cloud augmentation, and risk mitigation for enterprise mission-critical cloud services. CIOs should expect that IBM would augment and integrate its services using Red Hat with other cloud and multicloud services for enterprise cloud strategies.

Of course, IBM will attempt to deploy its consulting services army for uplift of revenue on every Red Hat solution. Red Hat operations should continue to grow organically without adding additional IBM services overhead. IBM should also be careful to not drive away from Red Hat opportunities by trying to add additional IBM services, except when they can truly add customer value. With that said, IBM’s CEO has a good shot to ring the revenue cloud bell as a winner.

Copyright @ 2019 HAWALD ADVISORY, LLC. DISCLAIMER: This article is my opinions without financial payments. I do not hold any stocks or affiliations with any of the mentioned organizations above. Editorial reviews: French Caldwell and Tom Austin. Image is by pixabay.com.

Disclosure

The views and opinions in this analysis are my own and do not represent positions or opinions of The Analyst Syndicate. Read more on the Disclosure Policy.

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