Can Red Hat save IBM?

IBM’s latest financial results show three or four years of stasis. That is better than declines, but can the $34 billion purchase of Red Hat put Big Blue back on a growth track?
Written by Jack Schofield, Contributor

Probably the best thing you can say about IBM's latest financial results is that they were OK. The company's revenues are pretty flat, which means it is still losing market position relative to the competition. 

IBM just declared annual revenues of $79.59 billion for fiscal 2018, which is roughly the same as the $79.14bn it made in 2017, and the $79.92bn from 2016. In fact, it's not significantly different from the $81.74bn it declared for 2015.

Of course, stasis is a huge improvement on previous years where revenues sometimes plunged by billions. However, as a company, IBM is still going nowhere fast. Its annual revenues were $81.67bn way back in 1998.


IBM has stopped its decline in revenues, but it's still losing market position to fast-growing rivals such as Google (above), Microsoft and Amazon's AWS.

Chart by Jack Schofield

How many computer companies are selling less stuff than they did 20 years ago, before the dot-com boom/bust, the internet market explosion, the arrival of smartphones and tablets, and a huge move to the cloud?

For comparison, Google has gone from zero to $110bn over the same 20-year time-frame, Microsoft from $15bn to $110bn, and Apple from $6bn to $229bn (Boom!). Even Dell has tripled its revenues, from $18.24bn in 1998 to $61.64bn in 2017.

One of the reasons IBM should be doing better is that it's been promoting itself as a cloud company — based partly on its purchase of SoftLayer and other companies — and the cloud has been growing very quickly

However, IBM's Q4 results showed its cloud revenues missing estimates: they were essentially flat at $8.93bn. Big Blue counts a lot of sales of traditional IBM mainframes as cloud revenues, and its systems division's sales dropped by 20 percent in the quarter, as the mainframe sales cycle turned down.

But Red Hat cometh

IBM is hoping things will change when it takes over Red Hat, an open-source software company, in the second half of this year. Backers claim this will make IBM the leader in the hybrid cloud market, and I'd be interested to see numbers that support this claim.

Obviously, it will come at a cost. IBM is paying $34bn or $190 per share for Red Hat, which was a 62 percent premium on its $116 market price. It's a lot to pay for a company with annual revenues of only $2.9bn in 2018. But if it enables IBM to grow its revenues every year, it might well be worth it.

The problem is that IBM is not flush with cash. Apple or Google or Microsoft could easily afford Red Hat, but currently, IBM has just $12bn in cash and $46bn in debt (though most of that debt supports IBM's Global Finance business). Rather than salting its cash away, IBM has spent around $100bn buying its own shares, and it has also paid shareholders big dividends. Indeed, IBM has increased dividends every year for more than 20 years, and now yields more than 4 percent.

SEE: 20 quick tips to make Linux networking easier (free PDF)

IBM has said that, to pay for Red Hat, it will suspend share repurchases in 2020 and 2021, but it will still have to take on a lot of debt, presumably by issuing corporate bonds. This doesn't mean that IBM can't afford to buy Red Hat. Clearly, it can. However, as with anyone who takes on a massive debt, it will restrict IBM's future options. It could also make the company more vulnerable to unforeseen events, including a US recession and a hike in interest rates.

Either way, the current idea is that Red Hat will continue to operate independently of IBM. Frankly, I don't expect this to happen, based on IBM's track record, and because, from a strategic point of view, it doesn't make much sense.

The best case scenario is that Red Hat's CEO Jim Whitehurst gets to run all of IBM's software operations and turns them around. The worst case scenario is that Red Hat gets bogged down by IBM's bureaucracy.

The Red Hat acquisition could be a big win for IBM: it could transform the company. Sadly, IBM's performance over the past 20 years suggests that might not happen. 


Red Hat sales softer than expected ahead of IBM purchase

Red Hat's bottom line beat Wall Street targets, but sales fell short of expectations. Red Hat's growth will be closely watched as IBM aims to close its acquisition.

Why IBM's purchase of Red Hat makes their future mostly cloudy (TechRepublic)

James Sanders takes a closer look at the motives behind IBM's move to join forces with Red Hat.

MongoDB "open-source" Server Side Public License rejected

Red Hat won't use MongoDB in Red Hat Enterprise Linux or Fedora thanks to MongoDB's new Server Side Public License.

DevOps for the hybrid cloud: Red Hat Ansible Tower 3.4

Red Hat is expanding its popular Ansible DevOps program so you can easily automate everything from your server to the hybrid cloud and back again.

Red Hat releases Red Hat Enterprise Linux 8 beta

The next major RHEL update is on its way with more container friendliness than ever.

IBM to buy Red Hat to stave off Amazon, Google, Microsoft (CNET)

It's the largest acquisition ever for IBM, and it's all about the cloud.

Editorial standards