IBM entered the history books on Sunday after making the largest ever software acquisition through buying open source vendor Red Hat.
Valued at $34bn (€30bn), IBM's software takeover dwarfs acquisitions made by Microsoft for LinkedIn ($26.2bn) and Softbank's takeover of UK-based ARM ($31.4bn), while ranking as the third-largest tech acquisition in history behind Dell's acquisition of EMC ($64bn) and Avego Technologies buying up Broadcom ($37bn).
IBM CEO Ginni Rometty went so far as describing the deal as one that has reset the cloud landscape and crowned IBM as the world's number one hybrid cloud provider.
However, some critics have lambasted the move as a "desperate deal" from Big Blue, as the vendor looks to remain relevant in a cloud computing market that is dominated by AWS, Microsoft and Google.
We heard from top executives from IBM and Red Hat, including Rometty, about Big Blue's big gamble to dominate the hybrid cloud arena.
Red Hat will bring something to 'every part' of IBM
Although Red Hat will become part of IBM's Technology Services and Cloud Platforms business segment, which saw year-on-year declines in the vendor's recent Q3 results, CEO Ginni Rometty told investors that the Red Hat acquisition will have a positive impact on every part of IBM's portfolio in some shape or form.
IBM's Systems segment, which includes hardware such as mainframes, storage and "cognitive systems", will be able to leverage Red Hat's offering around Linux mainframes, while its services segments, including Global Business Services, will be able to bolster their cloud migration capabilities through the acquisition, according to Rometty.
The CEO added that the deal will add 200 basis points to IBM revenues over a five-year CAGR. Red Hat will be accretive to profit margins and cashflow by the end of its first year as part of IBM, and to operating earnings after two years.
"For one thing - just take Red Hat itself - we have the ability to scale this everywhere. That was Red Hat's biggest constraint: scale and industry expertise," said Rometty.
"The next one is our own assets around our end-to-end integrated stack that is secure and open, so that also includes our AI and parts of our middleware and Cloud Private.
"The third piece is around our services team… every client I work with needs help on the cloud journey… They look at their apps and say: ‘do I shrink-wrap this one, break this one into micro services, break this one into the cloud, or three clouds, do I share data across them?' We go through this with so many clients and that is why we are scaling up in our services groups with this.
"Our customers see this as a way to extend their middleware. They have middleware portfolios from us that this attaches to, so it is a very important addition to our existing portfolio and it lengthens and extends it in a very important way.
"This lifts all the boats at IBM; there's something in here for every part of IBM."
Red Hat will continue as a standalone unit and will keep its branding
Executives reiterated to investors that Red Hat will be kept as a "distinct operating unit" within IBM as part of its hybrid cloud division. As such, Rometty assured that Red Hat's go-to-market and distribution model will remain entirely separate from IBM's.
Furthermore, IBM's SVP of hybrid cloud Arvind Krishna insisted that the Red Hat brand will "keep going for as long as I can foresee".
"There's no time limit on that," he said.
As far as integration goes, Rometty said there are no plans to uproot Red Hat employees or close the software vendor's offices.
"I want to preserve the brand and culture and their units around the world are all staying there - I am in one of them today - and the go-to-market stays distinct. So it is very clear to us what horizontally stays neutral," she added.
IBM 'not shy about making future divestments'
When asked whether IBM will look to sell off other parts of its portfolio following the completion of the Red Hat deal, Rometty did not hesitate in telling investors that she will make divestitures in the future wherever necessary.
She said that buying Red Hat should be taken as a sign that IBM is not afraid to take bold steps when it needs to.
"I think this shows that we are not shy about making an acquisition that we need to make and I am not going to be shy about divesting what we need to divest," she said.
"When we determine when it is time and what it should be, then we will. You don't need to fear that at all and our history proves that. In my tenure I have made almost $8bn of divestitures here. Yes, we are going to use [Red Hat's] stack to scale and we are not going to be shy about acquisitions or divestitures."
Red Hat will not cut ties with other public cloud vendors such as Microsoft and AWS
Along with assurances that Red Hat will remain a distinct, independent unit within IBM, executives also insisted that IBM's own public cloud would not receive preferential treatment over other public cloud giants that have also partnered with the open source software vendor.
Relationships with Microsoft Azure, AWS and others will continue as normal as IBM looks to maintain the "Switzerland" nature of Red Hat.
"Red Hat has to support a number of other public clouds and partners on the hardware and services ecosystem, so the independence of their ecosystem is essential for it to maintain value. We are going to absolutely do that," said Krishna.
Red Hat's president of product and technologies Paul Cormier added: "Red Hat Linux is already a major player on IBM public cloud and has been for years. That will continue and accelerate but with the proviso that it will also work with other public clouds. As we look to OpenShift [Red Hat's container application platform], we will also bring that to the IBM public cloud but we won't give any special advantage to IBM public cloud because we want to maintain the Switzerland nature of the Red Hat technologies business," he said.
Channel partners 'will get more and succeed more'
IBM and Red Hat execs promised no big changes to Red Hat's indirect business, which pushes around 70 per cent of its total $2.9bn in revenues.
Red Hat's existing channel incentives will remain in place, according to Krishna.
He said: "Channel partners should only look to get even more and succeed even more. We are going to completely keep the plans Red Hat has in place for channel partners all around incentives of where to sell, how to sell and with whom to sell and we will look to improve those as we go forward. There is nothing we will do to decrease the enthusiasm and impact the channel has in carrying all these products and technologies into the market."
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