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IBM purchase of Red Hat sounds more like a merger (or a marriage) than an acquisition

October 31, 2018

Red Hat and IBM—birds of a feather.

U.S. computer technology giant IBM announced Sunday (October 28th) that it has reached an agreement to buy Red Hat, a premiere U.S-based provider of open-source software (Linux) products to the enterprise community.

The deal will see IBM buying all of Red Hat’s available and outstanding common stock for USD$190.00-per-share, in an all-cash transaction worth approximately $34 billion, according to a press release issued Sunday by IBM.

The acquisition—the largest deal in IBM’s history and reportedly the third-largest ever in the U.S. tech sector—will see the Armonk, NY-based IBM paying upwards of a 60 percent premium for the Raleigh, North Carolina-based Red Hat.

Red Hat stock rose 49 percent the Monday after the announcement, from USD$116.68 to $174. While IBM stock fell 4.32 percent, from $124.75 to $119.36.

The term “open source” refers to the source code that a computer program or operating system is originally written in and the fact that the source code is left free and open for anyone to use, peruse and/or modify. Free, open source software (FOSS) is created and modified continually by untold thousand of programmers around the world, working collaboratively over the Internet.

FOSS is fundamentally the opposite of the proprietary, closed source software created by for-profit corporations such as Microsoft and Apple.

However, there is nothing to stop the developers of open source software from trying to make a profit by selling their software and expertise, as Red Hat has succeeded in doing. For-profit computer companies are likewise free to use open source software—even in proprietary ways. Google, for one, is a past master of using open source for its proprietary purposes.

What IBM is getting for its $34 billion

Red Hat is a major developer of the free, open source Linux operating system—the operating system that drives the Internet, not to mention Internet routers, web-browsing TVs, refrigerators, Internet-connected thermostats and lightbulbs, as well as most other Internet of things (IoT) devices.

In buying Red Hat, IBM is trying (desperately, according to some analysts) to strengthen its flagging position as a provider of cloud-based (a.k.a. Internet-based) computing. As of June 2018, IBM was ranked fifth as a cloud provider, behind Amazon, Microsoft, Google and Alibaba (of all things), which is down from its estimated number three ranking seven months earlier.

To say that IBM believes that buying Red Hat will put it on top of cloud computing is putting it mildly. According to Big Blue’s press release:

“‘The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,’ said Ginni Rometty, IBM Chairman, President and Chief Executive Officer. ‘IBM will become the world’s #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.

“Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs,” she said. “The next 80 percent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales.”

That IBM sees the purchase of Red Hat chiefly in terms of growing its cloud computing business is underlined by the fact that its press release announcing the acquisition refers to “cloud” 46 times, “hybrid” or “hybrid cloud” 13 times, “open source” 18 times and “Linux” a mere four times.

Hybrid cloud“, by the way, refers to a business model where a customer may satisfy some of their cloud computing needs using private computer servers (meaning, their own) and some using servers commercially available to the public (such as Microsoft Azure or Amazon Web Services).

As for the rest of what IBM’s Rometty is on about, whether I get it or not, I am certain that Red Hat’s boss, Jim Whitehurst, both understands and agrees with her wholeheartedly.

Both IBM and Red Hat sound like they’re on Cloud 9

It is important to know that IBM and Red Hat have a long and close history going back to 1999, when IBM committed to use Red Hat Linux on its enterprise hardware and continuing through a variety of open source partnerships to the present day.

IBM is a for-profit, proprietary IT company that knows and appreciates open source and Red Hat is an open source IT company that knows how to make a profit. There should be more synergies between the two than culture clash.

The IBM press release gushingly describes the acquisition as bringing “together the best-in-class hybrid cloud providers” and being “the evolution” of the two company’s “long-standing partnership”.

By the sounds of it, the pair had to hookup sooner-or-later. And there’s every reason to believe that the marriage deal will be a win-win for everyone involved.

For Red Hat’s part, it should benefit from a quantum increase in the technical and financial resources needed to advance its long-range plans—going from being an independent company with a public equity of USD$1.3 billion (2016) and net income of 258.80 million (2018), to being an independent division of a company with a public equity of $17.5 billion (2017) and net income of $5.7 billion (2017).

Certainly, that is the aspect of the acquisition that Red Hat’s Jim Whitehurst focuses on in the IBM press release:

“Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise,” said Jim Whitehurst, President and CEO, Red Hat. “Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience—all while preserving our unique culture and unwavering commitment to open source innovation.”

IBM’s press release goes to some pains to stress how Red Hat will not be assimilated Borg-like but will function with its identity, independence and character intact, not to mention its “open governance, open source contributions, participation in the open source community and development model…”

“Upon closing of the acquisition, Red Hat will join IBM’s Hybrid Cloud team as a distinct unit, preserving the independence and neutrality of Red Hat’s open source development heritage and commitment, current product portfolio and go-to-market strategy, and unique development culture. Red Hat will continue to be led by Jim Whitehurst and Red Hat’s current management team. Jim Whitehurst also will join IBM’s senior management team and report to Ginni Rometty. IBM intends to maintain Red Hat’s headquarters, facilities, brands and practices.”

IBM also takes the opportunity to stress how much it values open source software, as well as the expertise that Red Hat brings, both in terms of open source and cloud computing.

Red Hat’s role in the open source software movement is foundational, going back 25 years, almost to the beginning of the Linux operating system 27 years ago. And Red Hat maintains a preeminent position as a developer of Linux.

In 2016 Red Hat contributed eight percent of all changes to the Linux kernel—the essence of the Linux operating system—making Red Hat the number two corporate contributor (behind Intel) of code to the Linux kernel.

IBM, for its part, was number eight among corporate contributors to Linux kernel code in 2016, accounting for 2.27 percent of code.

The strange bedfellows the Internet has made

Microsoft hated Linux in 2001 but has recently developed quite a taste for it.

If the acquisition of Red Hat by IBM looks as much like an inevitable merger (or marriage) of two corporations that have been working and flirting with each other for years, it has to be said that it also looks to be part of a trend.

As the Internet has become central to an IT company’s profitability and as Linux has become the Internet’s operating system, open source expertise has become a coveted prize for large, proprietary, for-profit, computer companies looking to maintain marketshare—something between a trophy wife, a red sportscar and an insurance policy.

For over a decade now, it has been the thing to do for the largest proprietary IT companies to pursue close relationships with their former enemies in the free open source software (FOSS) community. And these former enemies have reciprocated because, well, the revolution goes on but realistically, the rent still has to be paid.

Opposites attract—a brief timeline

1998: Mark Andreesen—having gotten filthy rich off of his Netscape web browser (based on the government-funded NCSA Mosaic browser he helped develop)—gets out before Microsoft can crush him with its monopolistic promotion of Internet Explorer. Andreesen makes the Netscape source code public and sets up the Mozilla foundation to develop it, leading directly to the creation of the open source Firefox web browser.

1999: IBM agrees to promote the use of Red Hat Linux on its proprietary hardware.

2001: A year into his job as Microsoft’s buffoon-of-a-CEO, Steve Balmer publicly calls “Linux a cancer“, beginning a classic campaign of sowing fear, uncertainty and doubt (FUD) about open source software.

2001: Steve Jobs returns to Apple, bringing with him the operating system he created for NeXT, his second computer company. The NeXTSTEP OS, partially based on the open source OS FreeBSD becomes OS X, the new operating system of Apple Macintosh computers and later the basis of iOS.

2003: Hoping to revive its fading fortunes, software giant Novell purchases Ximian, a developer of open source Linux apps, then spends USD$210 million to buy SUSE, a German-based multinational pioneer in Linux sales and services to enterprise. Novell shares rose 21 percent on the news.

2004: The Mozilla Foundation releases version 1.0 of Firefox, its highly-anticipated open source web browser.

2004: Ubuntu Linux patron, CEO of Canonical and Space Shuttle passenger, Mark Shuttleworth famously issues Ubuntu’s Bug Report #1: “Microsoft has a majority market share in the new desktop PC marketplace. This is a bug which Ubuntu and other projects are meant to fix.”

2005: Novell spins off the openSUSE Project as an arm of the commercial SUSE, to develop the free openSUSE version of Linux.

2005: Google buys the Android operating system and refashions the proprietary, closed source OS using a core of open source Linux.

2008: Google begins the open source Chromium web browser project to serve as a development test bed for the proprietary, closed source Chrome browser.

2009: JasperSoft (acquired by Tibco Software, 2014) and Talend, open source providers of business intelligence (BI) software and data services, partner with two proprietary vendors: Vertica (analytic databases) and RightScale (cloud services) to deliver BI for clouds, triggering angst in at least one open source blogger.

2010: in March, software maker Attachmate acquires Novell (and SUSE) for USD$2.2 billion.

2013: Developers of Fuduntu, a popular distribution of Linux, call it quits after bullying from other developers, partly because the distro’s portmanteau name—combining Fedora and Ubuntu (two Linux flavours)—is seen to be in bad taste, bringing to mind Microsoft’s ugly “FUD” campaign against the FOSS community.

2013: Mark Shuttleworth closes Ubuntu’s Bug Report #1 because, well, Windows is still easier to use than Ubuntu and thanks to Android (basically the easy-to-use Linux) Google now has a way bigger majority market share than Microsoft.

2013: One of the organizers of the 2013 Future of Cloud survey declares that “open source is eating the software world” by driving the innovation in cloud, Big Data and mobile.

2014: in September, mainframe software maker Micro Focus buys the Attachmate Group (including Novell and SUSE) for USD$1.2 billion.

2016: Pigs are seen to fly as Microsoft—formerly the most vituperative enemy of open source software—becomes a Platinum Member of the Linux Foundation—the guiding organization of Linux.

2016: Towing the new party line, Former Microsoft CEO Steve Ballmer tells the media that he no longer thinks Linux is a “malignant cancer”.

2016: Canonical, the commercial patron of Ubuntu Linux, partners with Microsoft to bring native command-line Ubuntu Linux to Windows 10.

2017: Security experts are shocked to discover that Intel processors (which power the majority of desktop/laptop computers) have been running their own insecure version of the open source MINIX operating system—a 1980s Unix-like OS which famously inspired the creation of Linux.

2018: Microsoft announces its first Linux operating system: the Microsoft Azure Sphere platform, for its cloud services.

2018: Microsoft announces plans to buy the open source software repository GitHub for USD$7.5 billion.

2018: “Micro Focus to sell SUSE for $2.5 billion; shares rise.” Click the image to enlarge it.

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