What IBM’s Red Hat acquisition means for SA

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Ginni Rometty, IBM chairman, president and CEO.
Ginni Rometty, IBM chairman, president and CEO.

IBM’s acquisition of Red Hat will help the tech giant gain a significant share of South Africa’s cloud market, providing hybrid multi-cloud capabilities and delivering new experiences for local organisations.

This is the word from ICT analysts, commenting on what IBM’s recent purchase of open source software firm Red Hat means for South African organisations.

Last month, IBM and Red Hat closed a transaction under which IBM acquired all of the issued and outstanding common shares of Red Hat for $190 per share in cash, representing a total equity value of about $34 billion.

The deal, believed to be one of the biggest acquisitions of a business software company, is expected to accelerate IBM’s business model, extending Red Hat’s open source solutions to a broader range of clients.

Through the purchase, Red Hat’s open hybrid cloud technologies are now paired with IBM’s consultation and sales services, offered to more than 175 countries.

IBM says the deal is expected to boost its annual revenue growth and add about $1.5 billion in incremental free cash flow by the end of 2021.

IDC research manager Kieran Frost believes the acquisition will not only propel the companies’ revenues, but promises to deliver innovative hybrid cloud stacks and make it easier for local organisations to transition workloads to the cloud.

“Beyond benefiting from the development of new cloud solutions, South African organisations will be the primary beneficiary of the development of consulting services delivered through the joint offering posited by IBM-Red Hat.

“Through its acquisition, IBM can deliver services in, for example, cloud migration, app modernisation and hybrid cloud that in the past would have been far more difficult to execute, as they would have required multi-party consulting projects. Many organisations are already running both IBM and Red Hat – the joint value proposition makes this a potentially less jilted integration exercise to manage,” explains Frost.

Red Hat's fiscal year 2019 revenue was $3.4 billion, up 15% year-over-year. Fiscal first quarter 2020 revenue, reported in June, was $934 million, up 15% year-over-year.

Red Hat says it now owns more than 70% of the Linux operating system market, with growth rates in double digits.

Frost believes Linux penetration is likely around the 90% region globally, thanks to major use among the cloud providers.

“This acquisition lends even more credibility, as well as financial and consulting backing to a Linux distribution that already enjoyed pervasive use in the enterprise. Red Hat enjoys deep penetration in many enterprises, bringing IBM closer to kernel development. It also brings many key components that fill in major gaps that IBM had in its cloud strategy, including modern containerisation through OpenShift and hybrid cloud components.

Kieran Frost, IDC research manager.
Kieran Frost, IDC research manager.

“Perhaps most critically, Red Hat brings an enormous community of developers and system administrators – a community which IBM has not engaged with nearly as much success. Finally, Red Hat brings depth in the smaller enterprise, as well as penetration into third-party cloud providers.”

IBM, on the other hand, brings depth in penetration among larger organisations, deep consulting expertise and significant financial resources, which can ultimately benefit the trajectory of Red Hat’s expansion, he points out.

However, one major concern is how the acquisition itself will be managed from a scale perspective, with IBM having around 350 000 employees globally, while Red Hat only has roughly 12 000 employees, he warns.

“Maintaining the culture that has been so central to Red Hat’s success and momentum would be difficult. Another concern is that IBM’s track record in acquisitions has not been to maintain independence – and doing so would be to lose any critical benefits from integration, which is likely the key drivers for the acquisition in the first place.”

Accelerating SA’s cloud adoption

SA’s cloud market is forecast to grow by 29% in 2019 to $637 million, from a base of $494 million in 2018, according to IDC.

While growth is strong across the board, platform-as-a-service is expected to grow the fastest (32%), followed by software-as-a-service (30.9%), with infrastructure-as-a-service (24.6%) ranking third.

Derrick Chikanga, senior analyst of IT services at Africa Analysis, believes that with more local companies making the cloud shift, the deal will enable IBM to offer expanded cloud capabilities to local firms.

“More South African companies are migrating their workloads to the cloud, due to the need to modernise their IT processes. The acquisition will provide IBM with control over Red Hat’s open hybrid cloud technologies, thereby expanding its capabilities in the cloud space. As such, local firms will benefit from the additional technological capabilities, enabling them to offer innovative solutions to customers.”

While organisations across the globe are already using multiple clouds, IBM believes around 80% of workloads have yet to be moved to the cloud, held back by the proprietary nature of today's cloud market.

The company says the acquisition will strongly position it to address this issue, accelerate hybrid multi-cloud adoption for organisations and help it tap into the $1 trillion hybrid cloud market.

“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market," said Ginni Rometty, IBM chairman, president and CEO, during the joint venture announcement.

"Most companies today are only 20% along their cloud journey, renting compute power to cut costs. The next 80% is about unlocking real business value and driving growth. This is the next chapter of the cloud. IBM will offer companies the open cloud solutions that will provide the full value of the cloud for their businesses.”

The tech giant recently introduced a portfolio of new software solutions and services, which include products from across IBM's software portfolio, optimised to run on Red Hat OpenShift, and delivered on IBM's hybrid multi-cloud platform, IBM Cloud Paks.

According to IBM, the new portfolio, combined with other offerings, will strongly position it to be ahead of the curve in the hybrid cloud market.

However, Chikanga believes that meeting this ambition will largely depend on the technological developments of IBM's competitors and their offerings.

“The performance of other key players – namely Amazon Web Services, Microsoft and Google –will determine IBM’s position in the market. These service providers have been establishing partnerships, both at a global level and with local players, such as the BCX-Microsoft partnership, to enhance their product offering. Hence, the market will remain competitive, making it difficult to predict if IBM will emerge a market leader in the cloud space.”

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