IBM’s approach to growing its business through a combination of acquisitions aimed at creating a comprehensive multicloud platform is finally beginning to bear fruit. This comes after the tech giant spent the better part of a decade falling behind its market competitors.
On the 12th of March, IBM shares reached an impressive all-time high price of $197.78. This serves as a highlight of the stunning recovery made by the firm, which saw its share price slump to a low of $74 in 2020. Last year’s Q4 results revealed that IBM’s revenue had increased by 4% compared to the previous year, totaling $17.4 billion. Furthermore, their annual revenue reached $61.8 billion, marking a 2% increase compared to 2022.
AI and hybrid cloud have been identified as the primary contributors to IBM’s revitalization, as stated by the company’s Chairman and CEO, Arvind Krishna. In the fourth quarter, every segment of the business experienced revenue growth due to the ongoing adoption of their hybrid cloud and AI solutions.
In a call discussing IBM’s Q4 earnings, Krishna explained that every client he interacts with seeks to understand how they can use AI to improve productivity and manage their tech stack. Much of these tech stacks are spread across hybrid environments, public and private entities, and on-premises systems. According to Krishna, these ongoing trends continue to drive the demand for both AI and hybrid cloud solutions.
Until recently, IBM was seldom mentioned in discussions about the cloud market, playing catch up to AWS, Microsoft Azure, and Google. But that narrative is changing, thanks to a series of cloud-based acquisitions over the last decade. IBM is now focusing on creating two unique platforms – a multicloud and an AI platform – equipped with several USPs unseen in the Big 3 hyperscalers like cross-platform automation, compatibility with multiple clouds, and a professional service tie-in via IBM’s own consulting division.
The cloud-centric approach of IBM commenced in 2013 following its $2 billion takeover of SoftLayer. SoftLayer’s public cloud infrastructure was the ground for developing what we now know as IBM Cloud, and it remains a strategic part of IBM’s business model.
IBM continued its aggressive expansion in the past year, acquiring a number of companies operating in the cloud sector. This includes Polar Security (known for cloud data protection), NS1 (famous for networking and cloud automation), and Apptio (a hybrid cloud cost control software provider).
Perhaps the most significant acquisition in IBM’s cloud strategy has been its $34 billion Red Hat purchase, marking it as the biggest acquisition in the history of IBM. The Red Hat deal, conceived and executed by Krishna, an IBM veteran, became a central part of his responsibilities as head of the IBM Cloud and Cognitive Software business unit.
In 2020, Krishna ascended to CEO, and that’s when IBM stock began its dramatic ascent. Since Krishna took the helm, IBM has acquired 30 companies that are being integrated into IBM’s hybrid cloud, networking, and AI portfolios.
In a recent letter to investors, Krishna said, “Hybrid cloud and AI are the two next great shifts in the technology landscape, and IBM is positioning itself to play a key role in this swift and massive transformation. We see the hybrid cloud opportunity at $1 trillion.”
A key variable in the cloud landscape is the ability to work with multiple platforms, an ability that was strengthened with the acquisition of open-source pioneer Red Hat.
At the time of the Red Hat acquisition, IBM noted that its cloud revenue had grown from a paltry 4% of total revenue to a healthy 25% by 2019. IBM said that it expected the Red Hat acquisition to add “approximately two points of compound annual revenue growth to IBM over a five-year period.”
Expectations quickly started to become a reality. In 2022, Tom Rosamilia, who held the position of IBM’s SVP of Software at the time, classified Red Hat as the vital piece in IBM multicloud capabilities.
The rationale behind the $34 billion acquisition of Red Hat was to obtain OpenShift. The goal was to rebase the entire IBM software portfolio on OpenShift, shift it to a container model and develop it in a way that it could be utilized anywhere,” stated Rosamilia. By transitioning IBM’s Cloud Paks to OpenShift, IBM has managed to build a middleware environment. This enables IBM’s Cloud Paks to be implemented on IBM Cloud, AWS, Azure, or on-site.
The wager IBM made that the hybrid cloud, rather than an exclusively cloud-based model, would be the main operating system that most businesses would adopt, is also reaping profits.
Half a decade ago, advocating for hybrid cloud as an end goal posed a significant challenge. Everyone viewed it as a journey rather than a destination”, expressed Rosamilia. “In today’s times, we’re not having those debates anymore. Everyone has come to terms with the fact that some of their workloads will continue to function on-site, and modernization is necessary.”
Rosamilia argues that the era of “everything will move to the public cloud” has concluded. Hybrid multiclouds will be the standard due to governance, security, and financial considerations, not just a temporary stop on the journey to a fully public cloud network.
In its recent push towards a multicloud vision, IBM announced another essential hybrid cloud acquisition on April 24, planning to buy HashiCorp, a company specializing in multicloud infrastructure automation, for approximately $6.4 billion, or $35 per share in cash. This acquisition is anticipated to be finalized by the end of 2024. HashiCorp brings a long list of current clients to the table, just like Red Hat, including over 4,400 customers such as Bloomberg, Comcast, Deutsche Bank, GitHub, J.P Morgan Chase, Starbucks, and Vodafone.
HashiCorp’s primary offering, Terraform, provides automated provisioning and lifecycle management for infrastructure and security across varied multicloud surroundings. By integrating HashiCorp with IBM and Red Hat, the companies plan to offer clients a platform that can automate the deployment and orchestration of workloads across changing infrastructure, including hyperscale cloud service providers, private clouds, and on-premises environments.
Reactions to the acquisition of Red Hat were mixed at the time. Executives from Delta Airlines and Morgan Stanley, who are customers of both companies, publicly voiced their support.
Analyst Frank Gens from IDC expressed optimism regarding the arrangement, stating his belief that a standalone Red Hat under the larger IBM structure could offer substantial benefits for both parties. “Over the course of the next five years, IDC predicts hefty investment from enterprises on their cloud migration and ensuing enhancements. A significant and growing fraction of this investment will be designated towards open hybrid and multicloud environments, these enable the movement of applications, data and workloads across varying environments,” remarked Gens. “Given IBM’s acquisition of Red Hat, alongside their commitment to uphold Red Hat’s independence, IBM is excellently placed to assist enterprises in distinguishing themselves within their industry by leveraging open source within this rising hybrid and multicloud world.”
Conversely, some skeptics expressed concern that legacy factors from IBM could hinder Red Hat. A cursory glance through the conversations happening in r/redhat will reveal several harsh criticisms of the agreement from both developers and Red Hat users, both in the past and present.
Additionally, there was concern that IBM could undermine the culture at Red Hat. IBM is notorious for its conservative, corporate persona, which is a stark contrast to Red Hat’s more relaxed approach.
Nevertheless, Krishna sought to alleviate these concerns, stating that IBM would respect Red Hat’s independence and refrain from imposing its corporate image onto the company. “It is more probable that IBM would take on a fainter red hue, than Red Hat being dominated by IBM blue,” he stated back in 2019.
Red Hat and IBM have a history of both competition and cooperation in major cloud deployments. The unified company emphasized the continuation of this model. Both firms have been active proponents of open-source software. Leveraging Red Hat’s expertise in the commercialization of open-source technologies such as Linux, Kubernetes, Ceph, and others, the IBM-Red Hat partnership may promote further open-source implementation across cloud infrastructure. It also offers a potential escape from cloud vendor lock.
The merger was not welcomed by all partners, customers, and employees. Local concerns that IBM would inevitably change Red Hat into a different type of company, removing its innovative character, were expressed in a series of articles by Red Hat’s local newspaper in Raleigh, N.C. These negative sentiments gained momentum last year when Red Hat let go of around 4% of its workforce, sparking fears that this was the start of the end for Red Hat’s rebellious culture.
However, at the time of IBM’s acquisition, the open-source organization was generating annual revenues of $3.3 billion. Under the shelter of IBM, Red Hat-driven cloud software revenues reached $7.5 billion in Q4 2023. This marked a 3.1% increase from the previous year, continuing a steady growth trend that justifies the high acquisition cost.
IBM is expected to continue expanding its cloud platform with more acquisitions this year. This includes not just high-profile acquisitions like the multi-billion dollar HashiCorp purchase, but also smaller, tucked-in acquisitions. IBM has made more than twenty tuck-in acquisitions since 2020, including diverse technologies ranging from drive-thru systems to in-vehicle dashboard software.
CFO Jim Kavanaugh states that the current approach is likely to keep going in the near future. He informs us that IBM plans to continue expanding its holdings of companies linked with cloud technology and artificial intelligence, searching for an appropriate match with a company focused on hybrid cloud and AI platforms.
This practice of acquiring others is not at all uncommon. Huge incumbent firms such as Cisco, Microsoft, and Google have previously bought out companies. Their objective was not simply to fill in gaps in their product lineup, but also attempt to return to the forefront of relevance when faced with innovative rivals.
The general belief in technology circles goes something like: You won’t be fired if you choose IBM. Previously, this thought had started to lose its appeal with Cisco and Microsoft emerging as more popular alternatives. But presently, IBM – with its dual capabilities in artificial intelligence and multicloud technology – appears to be a safe choice as well as an intelligent one in terms of cloud services.
(Jeff Vance, the man who founded Startup50.com, a platform that finds, assesses, and ranks technology startups. You can follow him on Twitter, @JWVance, or connect with him on LinkedIn.)
