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Where IBM and Red Hat go from here

With Red Hat, IBM to become the leading hybrid cloud provider
This deal is the biggest Linux and open-source acquisition ever.

I’ve been following Linux, IBM, and Red Hat since Linus Torvalds was a graduate student. So, after IBM began its Red Hat acquisition for $34 billion, I’ve been watching it like a hawk. I spoke to dozens of IBM and Red Hat staffers and acquisition at the recent Red Hat Summit. Here is what I think will happen when the deal is done.

I believe Red Hat will remain, for all practical purposes, an independent company within IBM. As IBM CEO Ginni Rometty said in said in a conversation with Red Hat CEO Jim Whitehurst, “I don’t have a death wish for $34 billion.” Rometty continued, “I’m not buying them to destroy them. It’s a win win for our clients. It’s a way to drive more innovation.”

In short, “Jim and I have both agreed — Red Hat should stay an independent unit.”

IBM and Red Hat has been saying that all along. I believe them.

Let’s get real. This is a make or break decision for IBM. This is the single biggest technology deal in history. While IBM has stopped its decline in revenues, it’s still losing market share to its rivals such as Google, Microsoft and Amazon Web Services (AWS).

IBM tried to reinvent itself for the cloud age but it hasn’t worked well. According to RightScale’s 2018 State of the Cloud report, IBM lags well behind AWS, Microsoft Azure, and Google Cloud. IBM needs an injection of fresh blood. Red Hat gives IBM that transfusion with it Kubernetes-based hybrid cloud programs and its top-of-the-line staffers.

IBM’s top brass knows it can’t do that by just “buying” Red Hat. It has to, as one IBM executive put it, “Let Red Hat be Red Hat.”

That’s more than just lip service. Paul Cormier, Red Hat’s executive vice president, told me in an interview, “IBM absolutely understands IBM must stay separate. I’ll give an example. You would not see Satya Nadella [Microsoft’s CEO] on stage here if he thought that IBM/Red Hat was going to compete with him. We’re going to have to continue to partner [with other companies].”

Looking ahead when Red Hat talks to its customers and partners, Cormier said, “We won’t be biased to IBM services.”  It goes the other way as well. Say someone “in the mainframe group wants to sell SuSE Linux, it has nothing to do with us. They would figure that out in the IBM side, right, just like they do today.”

Moving forward, Cormier said, “there will be a blue [IBM] line and a red [Red Hat] line.” The two only come together at IBM and Red Hat’s highest levels. So, for example, if the hardware guys in the future say I want you to do more in RHEL [Red Hat Enterprise Linux] for z [mainframes], then we have a formal way to discuss that. And we would make the final decision or whether we would do that or who cares and supports it.”

Cormier contines, “Ginny told us from the beginning, to keep doing what we’re doing to make the [Red Hat] product line successful. They’re planning on Red Hat’s revenue growing tremendously. So they don’t want to block that.” In short, after IBM acquires Red Hat, “we look at it as having one shareholder instead of millions of shareholders.”

This isn’t just on the strategic level. On the day-to-day work level, Red Hat and IBM will continue to have separate sales, product, HR, and marketing teams. Of course, “we want to be smart about it too,” said Cormier. “If we can buy pencils cheaper because they buy a gazillion pencils, maybe we want to go on to that.” But in the field, “IBM sales guys will get comped on Red Hat products, but our sales guys will only get comped on Red Hat products.”

Of course, as Tom Petrocelli, Research Fellow for Amalgam Insights, told me, “Red Hat will be able to tap IBM’s sales force. That would give them reach into large enterprise deals that they have to work a lot harder for now. Their business is commercializing open source. They can now tap into IBM Research for more projects to become open source and have first crack at commercializing. I’m assuming they can also access financing on an IBM scale.”

Petrocelli also noted that from the outside “there is a valid concern that IBM will ruin Red Hat through a mix of internal politics and meddling. The short-term effect on that will be on hiring and customer retention. Red Hat customers are a loyal bunch, but many are already looking at a plan B. Employees are nervous but holding on. Both groups are primed for flight. One wrong move by IBM and a lot of customers and employees will bolt.”

I understand those fears. I’ve heard them too from both Red Hat staffers, customers, and partners. But the more I learn about how the IBM and Red Hat deal is coming down, the more I think both companies top brass are well aware of these dangers and they’re doing all they can do avoid them.

IBM and Red Hat’s leadership knows the stakes, they know the pitfalls. By keeping Red Hat an independent kingdom in the IBM empire, I think Red Hat will continue on its path to market victory.  The end result — the growth of the open-source based hybrid cloud — will benefit both. If they’re successful, I can see IBM resuming its place as one of the top global IT companies.

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