 From the SiliconANGLE Media office in Boston, Massachusetts, it's theCUBE. Now, here are your hosts, Dave Vellante and Stu Miniman. Hi everybody, Dave Vellante here with Stu Miniman. We're here to unpack the recent acquisition that IBM announced, the Red Hat, $34 billion acquisition financed with cash and debt. And Stu, let me get it started. Why would IBM spend $34 billion on Red Hat? It's largest acquisition to date of a software company had been Cognos. $5 billion is a massive move. IBM's Rometti, Ginny Rometti called this a game changer. And essentially, my take is that they're pivoting. I mean, their public cloud strategy was not living up to expectations. They're pivoting to hybrid cloud. Their hybrid cloud strategy was limited because they didn't really have strong developer mojo. Their blue mix Pazlayer had really failed. And so, they really needed to make a big move here. And this is a big move. And so, IBM's intent, and Ginny Rometti laid out the strategy is to become number one in hybrid cloud, the undisputed leader. And so, we'll talk about that. But Stu, from Red Hat's perspective, it's a company you're very close to and you've observed for a number of years, Red Hat was on a path, touting a $5 billion revenue plan. What happened? Why would they capitulate? Yeah, Dave, on the face of it, Red Hat says that IBM will help it further its mission. We just listened to Arvind Krishna from IBM talking with Paul Cormier at Red Hat. And they talked about how they're gonna keep the Red Hat brand alive. IBM has a long history with open source. As you mentioned, I've been working with Red Hat, gosh, almost 20 years now. And we all think back to two decades ago when IBM put a billion dollars into Linux and really pushed on open source. So, these are not strangers. They know each other really well. Part of me looks at these from a cynicism standpoint. Somebody on Twitter said that, Red Hat is hitting it at the peak of Kubernetes hype and therefore they're gonna get maximum valuation for where the stock is. Red Hat has positioned itself rather well in the hybrid cloud world, really the multi-cloud world. When you go to AWS, when you go to the Microsoft Azure environment, you talk to Google, that open source fits into that environment and Red Hat products specifically tie into those environments. Remember last year in Boston, and there's a video of Andy Jassy talking about a partnership with Red Hat this year up on stage, Microsoft with Azure partnering deeply with Red Hat. So Red Hat has done a nice job of moving beyond Linux, but Linux is still at its core. There definitely is concerned that the operating system is less important today than it was in the past. It was actually Red Hat's acquisition of CoreOS for about $250 million earlier this year that really put a fine point on it. CoreOS was launched to be just enough Linux to live in this kind of container in Kubernetes world and Red Hat of course, like we've seen often, the company that is saying we're going to kill you, well you go and you buy them. So Red Hat wasn't looking to kill IBM, but definitely we've seen this trend of softwares eating the world and open sources eating software. So IBM hopefully is embracing that open source ethos. I have to say day for myself, a little sad to see the news, Red Hat being the paragon of open source, the one that we always go to for winning in this space. So we hope that they will be able to keep their culture. We've had a chance many times to interview Jim Whitehurst, really respected CEO, one that we think should stay involved in IBM deeply for this, but if they can keep and grow the culture, then it's a win for Red Hat, but still sort through everything and it feels like a little bit of a capitulation that Red Hat decides to sell off rather than keep its mission of getting to five billion and beyond and be the leading company in the space. Well I think it is a bit of a capitulation because look, Red Hat was a three billion, roughly three billion dollar company growing at 20% a year, had that vision of five billion. It's stock in June had hit $175, so while IBM's paying a 60% premium off of its current price, it's really only about eight or 9% higher than where Red Hat was just a few months ago. And so I think as an old saying on Wall Street, the first disappointment is never the last. And so I think that Red Hat was looking at a long slog, they reduced expectations, they guided lower, and they were looking at the 90 day shot clock and this probably wasn't going to be a good, another couple of years for Red Hat and they're selling at the peak of the market or roughly at the peak of the market. They probably figured, hey, the window is closing potentially to do this deal, maybe not such a bad time to get out as opposed to trying to slog it out, your thoughts. Yeah, Dave, I think you're absolutely right. When you look at where Red Hat is winning, they've done great in OpenStack but there's not a lot of excitement around OpenStack. Kubernetes was talked about lots in the announcement, in the briefings and everything like that. I was actually surprised you didn't hear as much about just the core business. You would think you would be hearing about all the companies using Red Hat Enterprise Linux around the world, that that ratable model that Red Hat really has a nice base of their environment. It was really talking more about the future and where Kubernetes and Cloud Native and all of that development will go. IBM has done middling okay with developers. They have a strong history in middleware, which is where a lot of the Red Hat development activity has been heading. It was interesting to hear on the call, it's like, oh, well, what about the customers that are using IBM to say, oh, well, if customers want that, we'll still doing it. What about IBM with Cloud Foundry? Well, absolutely if customers want to still be doing it, they'll do that. So you don't hear the typical, oh, well, we're going to take Red Hat technology and push it through all of IBM's channel. It is really, this is in the IBM Cloud Group and that's really their focus as it is. I feel like they're almost limiting the potential for growth for Red Hat. Well, so IBM's going to pay for this, as I said, with as an all cash deal, IBM's got about $14.5 billion in the balance sheet. And so they're going to take out some dead S&P lower downgraded IBM's rating from an A plus to an A. And so the ratings agency is going to be watching IBM's growth. IBM said this will add 200 basis points of revenue growth over the five year cagger. But that means we're really not going to see that for six, seven years. And so, and Ginny Rometti stressed, this is not a back end loaded thing. We're going to find revenue opportunities through cross selling and go to market. But we have a lot of questions on this deal, Stu. And I want to sort of get into that. So first of all, IBM's, again, I think it's the right move for IBM. It's a big move for IBM, rumors were that Cisco might have been interested. I'm not sure if Microsoft was in the mix. So, IBM went for it. And as I said, didn't pay a huge premium over where this stock was back in June. Now, of course, back in June, the market was kind of inflated. But nonetheless, the strategy now is to go multi cloud, be number one in multi cloud. Well, what is that multi cloud leadership? How are we going to measure a multi cloud is, is IBM now the steward of open source for the industry? I mean, to your point earlier, you're sad Stu, I know, but. You bring up a great point. So I think back to three years ago with that Wikibon, we put together our true private cloud forecast. And when we built that, we said, okay, here's the hardware and software and services in private cloud. And we said, well, let's try to measure hybrid cloud. And we spent like six months looking at this. And it's like, well, what is hybrid cloud? I've got my public cloud pieces and I've got my private cloud pieces. Well, there's some management layers and things that go in between. And do I count things like Paz? So do you save people like Pivotal and Red Hat's OpenShift? Are those hybrid cloud? Well, but they live either here or there. They're not usually necessarily helping with the migration and moving around. I can live in multiple environments. So Linux and containers live in the public. They live in the private. They don't just fly around in the ether. So measuring hybrid cloud, I think is really tough. You know, does IBM plus Red Hat make them a top leader in this hybrid multi-cloud world? Absolutely, they should be mentioned a lot more. When I go to the cloud shows, the public cloud shows, IBM isn't one of the first companies you think about. Red Hat absolutely is in the conversation. It actually should raise the profile of Red Hat because while Red Hat plays in a lot of the conversation, they're also not the first company that comes to mind when you talk about them. Microsoft, middle of hybrid cloud. Oracle, positioning their applications in this multi-cloud world. Of course, you can't talk about cloud, any cloud without talking about Amazon's position in the marketplace. And SaaS is the real place that it plays. So IBM's one of their biggest strengths is that they have applications. Dave, you know the space really well. What does this mean vis-a-vis Oracle? Well, let's see. So Oracle, I think, is looking at this saying, all right, well, I would say Oracle is, IBM is Oracle's number one competitor in the enterprise. Not necessarily, I mean you got SAP and Amazon obviously in cloud, et cetera, et cetera. But let me put it this way. I think Oracle is IBM's number one competitor, whether Oracle sees it that way or not. But they're clearly similar companies in terms of the vertical integration. I think Oracle's looking at this saying, hey, there's no way Oracle was going to spend $34 billion on Red Hat. And I don't think they would have, or Richard didn't really spending any money on the alternatives, but does this put canonical and SUSE in play? I think Oracle's going to look at this and sort of message to its customers, we're already number one in our world in hybrid cloud. But I want to come back to the deal. I'm actually optimistic on the deal from the standpoint of I think IBM had to make a big move like this because it was, you know, largely just bumping along. But I'm not buying the narrative from Jim Whitehurst that, well, we had to do this to scale. Why couldn't they scale with partners? I don't understand that. This is, they're open. This is largely to me a services deal. So it's a big boon for IBM's services business. In fact, Jim Whitehurst, and Jim even said that today in the financial analyst call, Jim said our big constraint was services scale and the industry expertise there. So what was that constraint? Why couldn't they partner with Accenture and Ernie Young and PWC and the likes of Deloitte to scale and preserve greater independence? And I think that the reason is IBM sees an opportunity and they're going hard after it. So how will or will IBM change its posture relative to some of those big services plays? Yeah, Dave, I think you're absolutely right there because Red Hat should have been able to scale there. I wonder if it suggests that, you know, all of those big systems integrators, they're working really closely with the public cloud providers. And while Red Hat was a piece of it, it wasn't the big piece of it. And therefore I'm worried on the application migration. I'm worried about the adoption of infrastructure as a service. And Red Hat might be a piece in the puzzle, but it wasn't the driver for that change and the move and the modernization activities that were going on. That being said, you know, OpenShift was a great opportunity. It plays in a lot of these environments. It'll be really interesting to see and a huge opportunity for IBM to take and accelerate that business from a services standpoint. You know, do you think it'll change their position with regard to the SIs? I don't. I think IBM's going to try to present, preserve Red Hat as an independent company. I would love to see IBM do what, you know, EMC did years ago with VMware and float some portion of the company and truly have it at least be quasi-independent with an independent operating structure and reporting structure from, you know, standpoint of a public company. That would be, that would really signal to the partners that IBM is serious about maintaining independence. Yeah, now, I mean, look Dave, you know, IBM has said they will keep the brand, they will keep the products of all the companies that would buy Red Hat. I'm not super worried about kind of polluting open source. There, it was kind of nice that, you know, Jim Whitehurst would say, you know, if it's a Red Hat thing, it is 100% open source. And, you know, IBM plays in a lot of these environments. I had a friend of mine on Twitter was like, oh hey, IBM's coming back to open daylight or things like that because they'd been part of Cloud Foundry, they'd been part of open daylight. There's certain ones that they are part of it and then they step back. So, you know, IBM, credible in the open source space, if they can let Red Hat people still do their thing. But, right, the concern is that lots of other companies are going to be calling up project leads and contributors in the open source community that might have felt that Red Hat was the ideal place to live and now they might go get their paycheck somewhere else. There's rumors that Jim Whitehurst eventually will take over IBM. I don't see it, I just don't, I just don't think Jim Whitehurst wants to run, you know, Z mainframes and services and just, that's not, that doesn't make any sense to me. I think IBM's going to, you know, Ginny's getting to the age where she's, IBM's CEO's typically retire, you know, within the next couple of years. And so I think that it's more likely they'll bring in somebody from internally, whether it's Arvind or more likely Jim Cavanaugh who's got the relationship with Wall Street. Let's talk about winners and losers. It's just, again, a huge strategic move for IBM. Frankly, I see the big winners as IBM and Red Hat, you know, because as we described before, IBM was struggling with its, you know, execution and Red Hat was just basically finally hitting a wall after 60 plus scores of growth. And so the question is, will its customers win? The big concern I have for the customers is IBM has this nasty habit of raising prices when it does acquisitions. We've seen it a number of times. And so you keep an eye on the buyer, IBM customer, I'd be, or a Red Hat customer, I'd be locking in some attractive pricing long-term. And I would also be calling Mark Shulloworth and get his take and get that, you know, Amdahl coffee cup on my desk as it were. Other winners and losers, your thoughts on some of the partners and the ecosystem. Yeah, you know, when I look at this and say compare it to Microsoft buying GitHub, we're all wondering, you know, is this a real game changer for IBM? And if they embrace, you know, the direction, it's not like Red Hat culture is going to just take over IBM. There was in the Q and A with IBM, they said, will there be influence? Absolutely. You know, is this marriage of equals? No. You know, we are buying Red Hat and we will be, you know, communicating and working together on this. But you can see how this can help, you know, IBM is the direction, open source in the multi-cloud world is a huge important piece. Cisco, I think, you know, could have made a move like this. I would have been a little bit more worried about maintaining open source purity. If it was somebody like Cisco, there's other acquisitions. You mentioned, you know, Nicole and Suse are out there. If somebody wanted to do this, you know, the role of the operating system is much less important than it is today. You wouldn't have seen Microsoft up on stage at Red Hat Summit this year if, you know, Windows was the driver for Microsoft going forward. The cloud companies out there, to be honest, it really cements their presence out there. I don't think AWS is sitting there saying, oh geez, we need to worry. They're saying, well, IBM's capitulated, realizing that, you know, sure they have their own cloud and their environment, but they're going to be successful only when they live in and around and amongst our platform of Amazon. And Azure's gonna feel the same way, same about Google. So, you know, there's that dynamic there. What about VMware? So I think VMware absolutely is a loser here. When I went back to say one of the biggest strengths of IBM is that they have applications. When you talk about Red Hat, they're really working, you know, not only at the infrastructure layer, but, you know, working with developers and working in that environment. The biggest weakness of VMware is they don't own the applications. I'm paying the licenses to VMware and in a multi-cloud world, why do I need VMware, as opposed to, you know, Red Hat and IBM or Amazon or Microsoft have a much more natural affinity for the applications and the data in the future. What about the arms dealers? HPE and Dell in particular, and of course Lenovo, wouldn't they prefer Red Hat being independent? Absolutely they would prefer that they're going to stay independent as long as it doesn't seem to customers that IBM is trying to twist everybody's arms and get you on to Z or Power or something like that and continues to allow partnerships with the HPEs, Dell's, Lenovo's, the world. I think they'll be okay. So I'd say middling to impact, but, you know, absolutely they'd prefer, you know, Red Hat as an independent was really the switcher lint of the marketplace. You know, they were through, Ginny's side of, Ginny Rametti's side of three growth areas. One was Red Hat scale and go to market. And, you know, I think there's no question about that. IBM could help with Red Hat's go to market. The other growth vector was IBM's products and software on the Red Hat stack. I'm less optimistic there because I think it's the strength of IBM's products in and of themselves that are largely going to determine that success. And then the third was services. I think this is, I mean, I think IBM services is a huge winner here. I mean, having, you know, the bat phone into Red Hat is a big win for IBM services. They can now differentiate. And this is where I think it's going to be really interesting to see the posture of Accenture and those other big guys. I think IBM can now somewhat differentiate from those guys saying, well, wait, we have, you know, exclusive or not exclusive, but inside baseball access to Red Hat. So that's going to be an interesting dynamic to watch. Your final thoughts here, Steve. Yeah, Dave, absolutely. On the product integration piece, the question would be, you're going to have open APIs. This is all going to work with the entire ecosystem. Couldn't IBM have done more of this without having to pay $34 billion and put things together? Services absolutely will be the measurement as to whether this is successful or not. That's probably going to be the line item in financials that we're going to have to look at because Dave, going back to, you know, what is hybrid and how do we measure it? You know, what is success for this whole acquisition down the line? Any final pieces to, you know, what we should watch and how we measure that? So I think that, first of all, IBM's really good with acquisitions. So, you know, keep an eye on that. I think IBM's, I'm not so concerned about the debt. IBM's got strong free cash flow. Red Hat throws off a billion dollars a year in free cash flow. This should be in a creative acquisition in terms of operating profits. It might take a couple of years, but certainly from a standpoint of free cash flow and revenue growth, I think it's going to help, you know, near term. If it doesn't, that's something, you know, that's really important to watch. And then the last thing is culture. I mean, you know a lot of people at these companies. I know a lot of people at these companies. I really want to see, I mean, look, the Red Hat culture drinks the Kool-Aid of open. You know this. Do they see IBM as the steward of open and are they going to face a brain drain? That's why it's no coincidence that Whitehurst and Rometti were down in North Carolina today and Arvind and Paul Cormier were in Boston today. This is where a lot of employees are for Red Hat and they're messaging. And so that's very, very important. IBM's not, you know, foolish. So that to me, Stu, is a huge thing. I mean, Dave, IBM is no longer the, you know, navy suit with the red tie and everybody buttoned down. People are concerned about like, oh, IBM's going to give the Red Hat people a dress coat. Sure, the typical IBMmer is not in a graphic tee and a hoodie, but I mean, Dave, you've seen such a transformation in IBM over the last couple of decades. Yeah, definitely. And I think this really does, in my view, cement now the legacy of Ginny Rometti, which was kind of hanging on Watson and Cognitive and this sort of bespoke set of capabilities and the soft layer acquisition. It now all comes together. This is a major pivot by IBM. I think strategically it's the right move for IBM. And I think if in fact IBM can maintain Red Hat's independence and that posture and maintain its culture and employee base, I think it does change the game for IBM. So I would say smart move, good move, expensive, but probably worth it. Yeah, where else would they have put their money, Dave? All right, Stu, thank you very much for unpacking this announcement and thank you for watching. We'll see you next time.