IBM Buying Red Hat: Here's How It Could Affect the Channel

IBM’s weekend announcement that it will acquire open source vendor Red Hat for $34 billion is still being parsed throughout the IT industry, but for the channel it’s being seen as a promising move that could increase business and revenue for channel partners, according to a wide range of analysts and experts.

The acquisition, which IBM says is being made to increase the stakes and opportunities of both companies in the cloud marketplace – especially in hybrid cloud – comes more than 20 years after both first began working together, dating back to when Red Hat was just a startup offering its open-source Linux operating system as a free download or on CDs at technology conferences.

That long history is one reason the deal makes sense for both businesses, Ginni Rometty, chairman, president and CEO of IBM announced.

“Today’s announcement is the evolution of our longstanding partnership,” she said. “This includes our joint hybrid cloud collaboration announcement in May, a key precursor in our journey to this day.”

In an interview with Channel Futures, Jason Gartner, the vice president of cloud integration in the IBM hybrid cloud unit, said that bringing both companies’ rich channel ecosystems together will be a good thing for partners, adding power to their go-to-market strategies.

“We believe the cloud … is about a $1 trillion potential market that today involves only about 20 percent of the possible workloads that have been moved to the cloud,” said Gartner. “There is tremendous opportunity for the next ones to come.”

Jason Gartner

Jason Gartner

But those workloads will be more complicated than the earlier ones because they likely involve customers that need deeper security, regulatory compliance, nationalized data requirements and other more stringent safeguards, he said.

“This is where hybrid cloud will come into play, running workloads that span both public and private clouds.”

For the channel, he said, that will mean new business opportunities and challenges.

“Because of this,” Gartner said, “the architecture will become more nuanced. It’s why we think hybrid cloud is so important. For the channel, it’s a new realm.”

He said he expects new channel partners to appear as the acquisition moves forward.

“New technologies will emerge,” said Gartner. “I do believe it’s win-win for the channel partners on both sides. It is going to be a tectonic shift in the cloud space and I think we’ll all look forward to watching it happen.”

Because the acquisition is still awaiting regulatory approvals, Gartner said he couldn’t comment on whether the companies will continue to maintain separate channel relationships and structures in the future.

Tim Beerman, CTO of Ensono, a Chicago-area-based MSP, told Channel Futures that he sees the acquisition as good for both companies as well as for partners. Many are already invested in various aspects of open-source software, so the deal will likely further those investments.

“This acquisition has the potential to take Red Hat and its solutions to a whole new level of scale and broader investment into the hybrid cloud ecosystem,” said Beerman. “There is still a strong debate in the public cloud world about ‘lock in,’ if it really matters, and if so, what should you do about it. IBM and Red Hat will continue to bring solid solutions to market to address this and the channel should watch this closely to see where it can add these solutions to its portfolio.”

Tim Beerman

Tim Beerman

The deal isn’t as surprising as one might expect, he added.

“IBM has long been a big supporter of the Linux operating system — not only for its distributed environments, but also for its z System platform. IBM has also been a big supporter of open source in general, and this acquisition doubles down on that philosophy with Red Hat’s strong portfolio of open-source software supported by value-added ‘paid’ solutions for the channel and enterprises.”

For Red Hat, the deal is a huge win, he said, because it brings IBM’s financial backing to the open-source vendor, which will give it more flexibility.

“This acquisition will provide Red Hat with the scale to continue innovating on its platforms at an increased pace. For customers and the channel that are already big users of Red Hat software, this means more capabilities coming to market faster, and for potentially new customers, the reassurance that Red Hat will continue to get the investment needed to excel in this hypercompetitive market.”

Jo Peterson, the vice president of cloud services for Clarify360, called IBM’s acquisition “a bold move and a return to the company’s core competencies of software and services. Linux has become the most common OS in public cloud. This allows IBM to monetize the play and become a supplier to the other tech giants like Amazon, Microsoft and Google as Red Hat already has partnerships in place.”

IT analysts say they also see positives in the acquisition.

“From a channel standpoint, the deal holds significant promise,” Charles King, the principal analyst at Pund-IT, told Channel Futures. “That’s because IBM is clearly positioning it and Red Hat’s value proposition around hybrid cloud and assuring customers enhanced portability and security as they deploy applications, data and workloads in multiple cloud environments.”

That strategy lands smack in the middle of the sweet spot for channel companies that are already providing hybrid-cloud-enabling services and products, said King.

“At the same time, channel players who aren’t currently focusing on cloud consulting should seriously consider getting up to speed. Otherwise, they risk missing an opportunity to ride the coattails of the biggest, arguably most dynamic IT deal of 2018.”

Hyoun Park, the principal analyst for Amalgam Insights, said that Red Hat, which already earns about 75 percent of its revenue through the channel, will need to continue its strong relationships with the channel to continue and grow that figure.

“IBM is acquiring Red Hat, in part, due to Red Hat’s strong revenue growth, and IBM has stated that Red Hat will be run as an independent division of the Hybrid Cloud group,” said Park.

In the meantime, channel vendors should independently keep track of what’s happening as the deal progresses to monitor their options and statuses.

“Practically, there should be no immediate impact on relationships or operations as this acquisition is not scheduled to close until well into 2019,” he said. “But strategically, this does likely mean that Red Hat’s channel relationships will start to be more like IBM channel relationships starting in 2020-2021 after this acquisition takes place, assuming that it goes through.”

Dan Olds, principal analyst with Gabriel Consulting Group, called the deal “a big audacious move by IBM to massively increase their industry software footprint.”

Dan Olds

Dan Olds

This is by far IBM’s largest acquisition and one of the biggest acquisitions in the industry. IBM is paying $34 billion for a company that was valued at $20 billion and took in nearly $3 billion in revenue last year. While Red Hat’s numbers don’t support such a high purchase price, the company has been growing at a greater than 20 percent clip over the last couple of years.

What the deal will likely do is offer channel partners a wider variety of offerings to sell, said Olds.

“I can see IBM putting out entire software stacks, particularly in analytics, AI, and deep learning, that can be seamlessly matched up to whatever hardware the reseller wants to provide. Typically, figuring out and pulling together these types of complex combinations of software was a pretty difficult job. But IBM can simplify this significantly and make it easier for channel partners to sell these solutions to their customers.”

Another analyst, Jay McBain at Forrester Research, said that IBM’s acquisition of Red Hat “will inject important open source DNA into IBM’s strategy and selling organizations as well as give them a boost on growth.”

At the same time, Red Hat knows as much about driving revenue from open source as anyone, said McBain.

“From a plumbing perspective, the future of cloud is built on open source, specifically on the front end and programming languages,” McBain added. “Driving revenue from open source in the enterprise space is critical for IBM.”

Jay McBain

Jay McBain

Back in 2000, IBM invested its first $1 billion in Linux as corporate leaders saw the promise and staying power of the then-nascent computer operating system, which was being created at the time by Finnish university student Linus Torvalds.  

Under the acquisition deal, which has been approved by the boards of directors of both IBM and Red Hat, IBM will buy all outstanding and common shares of Red Hat for $190 each in cash. The acquisition, which is subject to Red Hat shareholder and regulatory approvals, is expected to close in the latter half of 2019.

As part of the deal, Red Hat will join IBM’s hybrid cloud team as a distinct unit and will continue to have independence and neutrality for its continuing open-source development, according to the companies. Red Hat CEO Jim Whitehurst and the rest of the company’s management team will also remain. Whitehurst also will join IBM’s senior management team and report to IBM’s Rometty.