 From the SiliconANGLE Media Office in Boston, Massachusetts, it's theCUBE. Now, here's your host, Dave Vellante. Hi, everybody, Dave Vellante here with Stu Miniman. We have some breaking analysis. We're going to break down the acquisition of IBM. Red Hat by IBM was announced today that it closed Stu. It was originally announced in October, a $34 billion acquisition, so not a surprise. Surprise that it closed a little bit earlier than people thought. People were thinking well into the second half, closed in July, they got through all the issues in Europe. What does this mean in your view to the industry? Yeah, so Dave, we did a lot of analysis when the deal was announced. Absolutely, the cloud and the ripples of chains that are happening because of cloud are the impetus for this. And the question we've been having for years, Dave, is how many companies can stay kind of independent in their swim lanes or what they're doing? Or are we going to see more massive consolidations where not that far off of the $67 billion acquisition of Dell by EMC to go heavily into the enterprise market? And of course, there are cloud implications, what happened there? And we're watching the growth of cloud, what's happening in the developer world. We've watched Red Hat for a long time and Red Hat has a nice position in the world and it carved themselves out a nice role into what has been emerging as hybrid and multi-cloud. And in my opinion, that's the number one reason why Arvind and the IBM team went to take that 20 year partnership and turn it into, now just part of the IBM portfolio. Arvind Krista, executive at IBM, who's a long time player there. So the deal is, so you talked about Dell's acquisition, we've talked a lot about the VMware model, keeping the company separate. Of course, Red Hat is not going to be a separately traded public company. It is going to be a distinct unit inside of IBM's cloud and cognitive software group, as I understand it. Is that right? So the question is, will it be reported separately or is it going to be, oh, we're going to throw everything into our cloud number? Yeah, so Dave, this is where all of us that have watched and known IBM for our entire careers because they've been around over a hundred years ask what's going to happen. So from reporting structure, Jim Whitehurst reports to Ginny from a Wall Street standpoint, it sounds like it's going to be just thrown into the cloud piece. Dave isn't it the standard practice today that you throw lots of stuff in there so we can't figure out what your cloud business really is. I mean, let's look at Oracle or even Microsoft and what they had. Amazon's probably the only one that clearly differentiates. This is revenue that we all understand is cloud and can touch and feel it. So sure, IBM, you've got all of the piece that used to be soft layers, now the IBM cloud piece. There are lots of software pieces in that mix. The cloud and cognitive is a big umbrella and Red Hat adds a few billion dollars worth of revenue into that stream. So IBM's assumptions here, Ginny talks a lot about chapter two. Chapter one was a lot of front end systems. That's what a lot of the growth was. Everybody thought everything was going into the cloud. That's really not the way it is. The 80% of the workloads are still on-prem and chapter two was all about connecting those to any cloud, multi-cloud, her words, the IBM cloud or the Amazon Google or Microsoft cloud, et cetera, et cetera. She made the statement that we are the only hybrid multi-cloud open source company. Okay, I guess that's true. Does it matter that they're the only hybrid multi-cloud open source company? And are they? Yeah, so I mean, Dave, any time a vendor tries to paint themselves as the number one or leader in this space, that's how they're defining it. That's not how customers think of it. Customers don't think as much about whether it's multi-cloud or hybrid cloud. They're doing cloud and they're working with more than one supplier. It is very rare that you find somebody, I'm all in and then you dig in. Oh yeah, wait, I'm using Office 365 and Salesforce and oh wait, there was that cool new thing that Google announced that somebody off on the side's doing. So we understand that today it's a multi-cloud world. Tomorrow it'll be a multi-cloud world. Absolutely, open source is growing at great leaps and bounds. Red Hat is the best example we've had of that trend, something I've been watching for the last 20 years and it is impressive to see it. But even when you talk to customers, most customers are not flag-waving. I must do everything open source. They have a little bit more nuanced view of it. Sure, lots of companies are participating and contributing to open source. But I've yet to talk to too many companies that were like, well, when I'm making this decision, this is absolutely what it is. Am I concerned about my overall costs? Am I concerned about transparency? Am I concerned about security and how fast I can get things resolved? And by the way, open source can help with a lot of those things. That's what they need to think about. But look, IBM had a long-time partnership with Red Hat. Red Hat has a strong position in the marketplace but they're not the only ones there. You mentioned VMware, Dave. VMware, of course, has a strong play across multi-cloud environments. We see Red Hat at all of the cloud shows. You see IBM at many of the cloud shows. But you've got Cisco out there with their play. It is still this chapter two, if you agree with Ginny's terminology, we are relatively early in that. But IBM, I believe, has strengthened in their positioning. I don't think it radically changes the landscape just because Red Hat is still going to stay working with the Amazon, and Microsoft, and Google, and other players out there. So it doesn't dramatically change the landscape. It just consolidates two players that already work closely. Well, let me ask you a question. So IBM is clearly positioning this as a cloud play, generally, and in a multi-cloud specifically. Is this a cloud play? So I'll say yes, but, Dave, so absolutely the future and where the growth for Red Hat and where IBM and for this $34 billion to be successful, the tip of the spear is open shift. And therefore, how does that new cloud native, multi-cloud environment, where do they play? But at its core, Red Hat is still Linux. Red Hat Enterprise Linux is still, that is the primary driver of revenue. And Linux isn't going away. As a matter of fact, Linux is growing. Microsoft just revealed that there are more Linux workloads sitting in Azure than there are Windows. We already knew that there were strong Linux out there and Microsoft is at Brace Linux. We saw Satya Nadella at Red Hat Summit. And we've seen that proliferation of Linux out there. So Linux is still growing in where it's being used out there and in the cloud. Linux is what most people are using. So the reason why I think this acquisition, it's interesting, Jim Whitehurst today said publicly that it was a great deal that IBM was getting, but then he couched and he said, of course it's a great deal for our shareholders too. So, and Ginny chimed in and said, yes, it was a fair deal. Okay, fine, 34 billion, we'll see. The reason why I think IBM likes this deal and IBM generally has been good in history with acquisitions, clearly some mega acquisitions like PWC, which was transformative, maybe we have time to talk about that. Cognos and some of the other software acquisitions done quite well, not 100%, but the reason why I think IBM likes this deal is because it's a good cash flow deal. So I think in many ways, and they don't talk about this because it's not sexy marketing, but IBM is a services company. Over 60% of the company's revenue comes from professional services. IBM loves complexity because they can bring in services throw the big blue blanket around you and do a lot of integration work. And the reason is that I think this is an interesting acquisition from a financial standpoint and Ginny says this all the time. This is not about cost synergies. This is about revenue opportunities. When you try to put everything in the cloud, you always run into the backend systems. And her point is that those backend systems need to be modernized. How do you modernize those backend systems? Open shift, it's not trivial to do that. You need services. And so IBM has a large install base, probably by my estimate, certainly tens of billions of dollars of opportunity there to modernize backend systems using Red Hat technology. And that means that it's a front loaded deal from a cash flow standpoint that they will find automatically revenue synergies to plug in to IBM's captive install base. What are your thoughts? Dave, I think that your analysis is spot on. So Red Hat has been one of these most consistent revenue companies out there. You steadily, when they went from a billion dollars to now they're right around three billion dollars, they had the March to five billion dollars. They had a couple of minor blips in their quarterly earnings, but if you plug in that IBM services organization, you really have the opportunity to supercharge. This is not, the opportunity is to have that huge IBM services organization really help grow those engagements, do more OpenShift, get more Linux, help Ansible really become the standard for automation in the modern workplace. The challenge is that too many IBM people get involved because the thing that everybody is a little worried about is IBM's done well with a lot of those acquisitions but they don't leave them stand alone. Even VMware for many years was a standalone company. Today, VMware and Dell, they're one company. They're in lockstep from a management standpoint and they're working closely together. What differentiates Red Hat is, IBM has groups that are much larger than Red Hat that do some of the same things, but Red Hat with their open source mission and where they're driving things and the innovation they drive, they move a little bit faster than IBM traditionally does. So can the Red Hat brand, the Red Hat people and Red Hat still stay independent enough so that they can till hop on that next wave. They jumped early into Kubernetes and that was the wave that really helped them drive for what they're doing with OpenShift. Even Dave, Red Hat had bought CoreOS which was a smaller company moving even faster than Red Hat and while they've done a really good job of integrating those people, absolutely from what I've heard, it has slowed things down a little bit just because Red Hat compared to CoreOS was a much bigger company and of course, IBM is a BMF compared to Red Hat. So will they throw these groups together and who will be making the decisions and can they maintain that culture and that growth mindset? Well, the point is structurally, we bring up VMware a lot as the model and of course when EMC bought VMware for a paltry $635 million it folded it in and then spun it back out which was the right move, certainly allowed the ecosystem to blossom. I don't think IBM is going to take that same approach. Blue Wash is the term, they'll probably Blue Wash that now. Oh no, Dave, they said, IBM has said they will not Blue Wash, there's no purple, red stays separate but absolutely there's concerns. So to get those revenue synergies, you're going to have to plug into IBM systems and that requires some work and IBM is generally good at that. So we'll see, we'll keep our eyes on that. But I would predict that IBM is not going to do a VMware like, it's going to be some kind of hybrid. Dave, one of the other things is you talk about, so Jim Whitehurst, you know, executive, respective, had him on theCUBE a lot, he's reporting to Ginny, you know, the question is, is this Ginny's last big move and who replaces her? Yeah, let's talk about succession planning. So a lot of rumors that Whitehurst is next, he's 52 years old, I've said I don't think they would do that, but let's talk about it. First of all, you know Jim Whitehurst, I sort of interviewed him a number of times, but you know him quite well. You think he even wants the job. So you know, I talked with Jim a little bit at Red Hat Summit, you know, he kind of makes light of it. He said, you know, knowing IBM the way we all know IBM, IBM has always taken somebody from inside to do that. He feels that he has a strong mission still to drive Red Hat. He is super passionate about Red Hat. He wrote a book about the open source culture and is still driving that. So I think from everything I see from him, that's still the job that he loves and wants to do. And you know, it's a very different challenge to run IBM. I'm not saying he would turn it down if that was the direction that it went, if it went down to it, but I did not see him angling and positioning like that would be where he wants to go. Well, and of course, you know, Jim is from North Carolina. He's got that kind of Southern folksy demeanor, you know, comes across as the nicest guy in the room. He's also the smartest guy in the room. And so we'll see, we'll see what happens there. I've said that I think Martin Schroeder is going to be the next CEO of IBM. Martin Schroeder did, you know, three years of combat duty as the CFO in what was a tough time for IBM to be a CFO. They were going through those big transitions, talking about, you know, they had to do the software acquisition. They had to put together those strategic initiatives. And so he has CFO chops. So he understands finance deeply. He ran, you know, one of IBM's big services business. He's now responsible for IBM's revenue generation. He's a spokesperson, you know, in many ways for the company. He's like the prototypical choice. It would not be surprising at all to see IBM plug him right in. A little bit of history. As you know, Stu, I'm a bit of a historian of the industry. I've been around for a while. John Aker is back in the early 1990s when IBM's mainframe business was tanking and the whole company was tanking and it was at the risk of actually, believe it or not, running out of money. They were going to split up the company because the industry was breaking apart. Intel and microprocessors, Microsoft and software, Seagate and disk drives, you know, Oracle and databases. And to be more competitive from a product standpoint, they were going to split the company up into pieces. Gershner came in and said, no way. Gershner was, you know, CEO of American Express said, no, that's not how customers want to buy. He bought PWC for a song compared to what Carly Fiorina at HP, Carly Fiorina at HP wanted to pay, I think 15 billion for it. I want to say IBM paid five billion or maybe even less for PWC. They completely transformed the company and it transformed IBM into a services company. And that's what IBM is today. They don't like when you say that but that's where the revenue is coming from. What that did, and they also started to buy software companies. IBM was restricted from getting into applications for years and years and years because of the DOJ, because they owned the mainframe, they had a monopoly, well, Microsoft and Intel changed all that. IBM started to buy software companies and bought lots of them. So they became a services company with a collection of software assets and the mainframe and the power, they have a storage business and finance, IBM global finance business, et cetera, et cetera. So my point is, how about sure Jim Whitehurst would want to run that? You know, it's kind of messy. Now, what you need to run that is somebody who really understands finance, knows how to turn the knobs. And that's why I think Martin Schroeder is actually an excellent pick for that, to keep the cash flow going, to keep the dividend going, to keep the stock buybacks going. It's still, in my view, not a growth play. I think there's certainly near-term growth that can be had by modernizing applications, but I don't look at IBM as a growth company. I look at IBM as a portfolio company that throws off a lot of cash. And if and when the market stops rewarding growth and profitless growth, a company like IBM will become more favorable to investors. Yeah, and the question at the end of the day is after spending $34 billion for Red Hat, does IBM help weather the storm of what is happening with the phenomenal growth of AWS, the changes happening in Microsoft, build more of a relationship than they've already had with Google, and help position themselves for this next wave of IT? Does IBM help create a lot of the waves that happen in IT? Well, the pure-play cloud players are in it for the long game. You know, Amazon's philosophy is give tools to builders and allow them to disrupt the traditional old guard, whether it's old guard technology companies or old guard industry players. And you've seen the stat of how many Fortune 1,000 companies or have gone out of business in the last 20 or 30 years, whatever it is, that's going to continue. And Amazon and certainly Google and Microsoft want to support that disruption by providing cloud tooling and put the data in the hands of people that allows them to create new business models. Now, that doesn't mean everybody's going to throw out their mainframes, it's not going to happen. It's certainly not going to happen overnight and probably will never happen. But I just don't see how IBM becomes a growth company in that scenario. The growth is going to continue to be with the cloud. But Dave, we had seen IBM, I'd say struggle a little bit when it comes to the developers these days and the Red Hat acquisition is definitely going to be a boon to them in this space because Red Hat, all about the developers, that that's what their customers are. So that's such a huge community that they've already tapped into. So Jenny has said this hybrid multi-cloud is chapter two, it's a trillion dollar opportunity. So who else is going after that trillion dollar opportunity? Let's lay it out there. Who are the multi-cloud players? VMware, obviously IBM Red Hat with OpenShift is in there. Google with Anthos, Cisco is coming at it from a network perspective. So they have coming at it from their position of strength even though they're relatively new entering into this space. Everybody wants to be the new management layer in this multi-cloud environment. What VMware had done is had, vCenter became the console for everyone as they were consolidating all of their silos. And when I go to a multi-cloud environment, right. Where do I live? Microsoft has a strong play there. That's the other company. So it's VMware, IBM Red Hat, Anthos, Google Anthos, Cisco and Microsoft. Yeah, and of course the one that while they won't say that they are multi-cloud, you can't talk about multi-cloud without talking about Amazon because Amazon is a piece of everyone's cloud environment. We're seeing what they're doing without posts there. So they are the kind of specter looming over this entire multi-cloud discussion. Yeah, you're right on. I think you got to put Amazon into that mix. They will be an entrant into this multi-cloud play. And it's not going to be a winner-take-all deal. Like I say, Cisco's coming at it from a position of networking strength. Microsoft has its software estate and it's going to do very well there. IBM Red Hat coming at it from a standpoint of modernizing applications and there's a services play and services component there. And VMware, of course, coming at it from the infrastructure operating system. I don't see Oracle as interested in that market. There may be some smaller players like Turbonomic, who probably get gobbled up by one of these guys that we just mentioned. But that really is the landscape. And there's five, six companies, a trillion dollars, there's plenty to go around. All right, Stu, final thoughts on the Red Hat news, the IBM news that they've finalized the Red Hat acquisition, what should we look for? What should we look for? So what you want to look for is, first of all, what's happening organizationally? If OpenShift is the primary, the tip of the sphere what we're talking about here for this cloud-native, multi-cloud world, what does the IBM cloud messaging look like? They're going to have an analyst event here in a couple of weeks that they've invited all the analysts to going into what does that cloud portfolio look like? How do they sort through all of the Kubernetes options that they've had today? Do they try to elevate IBM cloud to be a stronger player? Or will they let Red Hat continue to play across all of the cloud environments that they have? So organization and product positioning are the two things that I'm looking at the most. Tom Siebel said publicly yesterday that IBM is a great company, a national treasure. But they miss cloud and they missed AI. I wouldn't agree totally. They didn't miss cloud. They were late to cloud. They had to buy software. They're in cloud, just like Oracle's in cloud. They're not as competitive as the AWS cloud, but they've got a cloud. HP doesn't have a cloud. Dell doesn't have a cloud. These two companies that I just mentioned do. AI, yeah, they're not sort of generalized AI like with Google and Amazon and Facebook and Microsoft are doing. IBM's trying to solve big chewy problems. IBM's a services company, as they said. So Watson, you see a lot of negative stories about Watson, but Watson requires a lot of services to make it work. And it's, as they say, solving different problems. So they're a player in AI. Multi-cloud is new. And this move, the acquisition of Red Hat, yes, $34 billion expensive. It's not going to be pretty on the balance sheet, but they got good cash flow. So they'll deal with that over time. It puts them right in the mix as a leader in multi-cloud. So thanks, Stu, for breaking down the acquisition. And thank you for watching. This is Dave Vellante with Stu Miniman. We'll see you next time.