IBM/RED Hat: “Big Who?” gambles big to stay relevant
“Big Blue” – IBM – was once the world’s biggest force in information technology, but in recent years it has been battling to stem its decline, said The Economist. How should it counter the rivals who ate its lunch during the great shift to cloud computing? The answer, according to CEO Ginni Rometty, is for Big Blue to don “red headgear”. In the biggest deal ever seen in the software sector, IBM is paying $34bn in cash to acquire Red Hat, the world’s biggest vendor of opensource software.
Red Hat is no household name, but it’s a big hitter in computing – a fast-growing company attracting corporate clients who don’t want “to be tied into Amazon, Google or Microsoft”, said Robert Cyran and Liam Proud on Reuters Breakingviews. Still, it’s questionable whether it’s really in IBM’S interests to pay a whopping 63% premium to acquire the firm: it would take a “huge shift” to earn an attractive return – particularly given the risk that “Red Hat’s freewheeling culture may not gel” with “buttoned-down” IBM. It looks suspiciously like IBM (aka “Big Who?” these days) “is overpaying for relevance”. This “cloud surge” smacks of “desperation”.
Betting a third of IBM’S stock market value on a highly risky “transformational acquisition” is certainly a big gamble for Rometty, said Richard Waters in the Financial Times. This deal will determine how business history judges her. “Will she go down as another Steve Ballmer, the Microsoft CEO whose investments in new markets like the cloud prepared the ground for corporate revival under his successor?” Or will she be “the next Jeff Immelt”, whose “silver tongue and unquestioned smarts masked a failure to deal with the rot” at the heart of General Electric? Only time will tell.