RALEIGH – IBM $34 billion acquisition of Red Hat became official this week, and what may happen now is that a red wave overwhelms the blue. At least that’s what one of the Hatters’ founders and its first CEO sees with the much smaller Raleigh-based firm exerting a lot of influence on its new parent.
“It seems like an interesting partnership to me,” Bob Young, who cofounded the company in 1994 and became a serial entrepreneur as as well as a multi-millionaire, tells WRAL TechWire’s Chantal Allam.
Partnership, not merger?
Young, regarded as a tech legend in the Triangle for his success at Red Hat followed by publishing firm Lulu and drone industry pacesetter PrecisionHawk, explains:
“IBM has customer relationships with every major government, corporation, and institution on planet Earth.
Red Hat’s new logo
“Red Hat has a very valuable set of tools, and more importantly, a uniquely valuable approach to technology, for those customers.
“It may work out that that deal was a bit of a reverse merger, meaning IBM will likely look more like Red Hat in future.”
He’s not alone.
IBM’s Arvind Krishna, head of Cloud and Cognitive Software, acknowledged Red Hat’s coming influence in a conference call after the deal closed, noting that there could be some “red washing” of IBM as opposed of “blue washing” Red Hat. Blue washing would be “a bid thing,” he added, according to Technology Business Research.
Young brings a great deal of experience and hard-earned insight into deal making over the past 25 years, from Red Hat to his post-Red Hat black-and-red fedora days to founding Lulu, a publishing firm, and getting drone startup PrecisionHawk off the ground.
But the scale of the marriage between Big Blue and all things red is huge – enough to knock Young’s now ever-present baseball cap off.
IBM’s acquisition of Red Hat, which was announced last October, is the biggest in the tech giant’s history. It also ranks as the second largest tech merger to date, trailing only Dell’s $67 billion buy of EMC four years ago.
CEO Whitehurst declares in letter to employees: ‘Red Hat is still Red Hat’
The deal comes as IBM, while maintaining a large campus and several thousand employees in RTP, is not the Triangle behemoth it was earlier this decade. As Red Hat’s workforce grew steadily over the years to more than 13,000 the Triangle campus shrank to well under 10,000. Still, the impact on the Triangle will no doubt be huge as thousands of Red Hat workers begin receive paychecks from a new boss as well as cash -$190 for every share they own.
The deal also surpasses the previous largest corporate merger in North Carolina history – Duke Energy’s $30 billion-plus deal (including debt) for Progress Energy in 2012.
But will Red Hat disappear as Progress Energy did, its headquarters abandoned to be occupied by – ironically – Red Hat?
Some people already have speculated that Jim Whitehurst, Red Hat’s current CEO (third in line after Young and Matthew Szulik), will soon be in position to succeed IBM Chair and CEO Ginni Rometty when she retires. Rometty turns 62 on July 29. Previous IBM CEOs stepped aside at age 60. Big Blue pushed back against talk last year that she will step down or that the company has looked for a replacement.
Top tech mergers
- Dell buys EMC ($67 bn, 2015)
- IBM acquires Red Hat for $34 billion (deal yet to close)
- HP buys Compaq ($33.6 bn, 2001)
- SoftBank buys ARM ($32.3 bn, 2016)
- Microsoft buys LinkedIn ($26 bn, 2016)
- Facebook buys WhatsApp ($19 billion, 2014)
- HP buys EDS ($15.4 bn, 2008)
- Intel acquires Mobileye (#15.3 billion, 2017)
Source: IT World Canada
Yet will Red Hat really punch above its weight?
While the other two deals already mentioned were more or less a merger of peers, IBM dwarfs Red Hat in size:
- Seven times the annual revenue, $22 billion to $3.4 billion
- Nearly 30 times as many employees, 350,000 worldwide vs. 13,400
However, several points need to be made that point to Red Hat having far more leverage in this deal than a superficial view provides.
- From the start, Whitehurst insisted that the Hatters would operate separately; Rometty went along with that stipulation, recently saying at the Red Hat Summit in Boston that she had “no death wish” and her promise of autonomy would be fulfilled.
- Whitehurst and several managers of the top management team are locked in to staying with the merged companies for two or three years with millions of dollars in stock at stake. For example, Whitehurst stays for three years to get $15 million.
- IBM is paying $34 billion for Red Hat stock at $190 a share, far above the $116 a share when news of the deal broke. And Big Blue went to bond markets to raise $20 billion to finance the deal.
In order words, Rometty is betting a lot of IBM’s future on Whitehurst and Red Hat. Her goal is to create a cloud computing giant, talking a trillion dollar company. After years of stagnant or negative revenue growth, Rometty needs the Red Hat deal to work – and produce a lot of cash to help lift IBM’s financials.
Ginni Rometty (IBM photo)
There’s also the “fresh blood” of Red Hat talent. Young and co-founder Marc Ewing set out to build a company of free spirits that were as open as the Open Source foundations of Linux software. Known for its penguin logo, Linux believers always have marched to a different drummer. And so has Red Hat’s workforce even as the company has grown and made its own numerous acquisitions.
“People have the misconception that there’s a desire to want to strip out everything that made Red Hat successful. That’s not the case,” IBM’s Vice President and Chief Data Officer Tim Humphrey recently told WRAL TechWire.
“From the innovation and culture, to the leadership and decision-making, we want to keep all that intact. That’s why we purchased them.”
Humphrey, who also is IBM’s top executive in North Carolina, added that “the Red Hat brand stays intact.”
IBM also says Red Hat’s headquarters will remain in Raleigh, and executives say there is no talk of layoffs. In fact, the opposite might occur.
Red Hat leaders pose before new tower signage. WRAL TechWire photo by Chantal Allam.
So the Hatters have a lot of leverage to dictate a lot of terms.
IBM’s culture has changed little if at all over its 25 years. For example, only weeks ago the company changed the fedora logo embraced by Young from its earliest days. Changes in the company meant a need for a new logo, the company said. But tradition was honored, too. Only the color scheme really changed. The logo is still a fedora. The Young connection remains.
‘Out of body experience’
For Young, the IBM deal to buy the company that he left in 1999 is remarkable, to say the least.
“Red Hat was founded out of my wife’s sewing closet … and will now be sold to IBM,” he told the NC Technology Association last November shortly after the deal was announced. “That’s an out of body experience for me.”
Yet when he sat down to answer a series of questions recently posed by WRAL TechWire before the deal closed, Young admits that he also saw a great opportunity for Red Hat even in the early days when he was working from home after having lost a job and his life savings in the process.
IBM Red Hat merger
“Could you ever have imagined such a grand exit as IBM?” we asked.
“No and yes.
“No in the sense that it is an out-of-body experience to think that a business that we started because we were just trying to pay the month’s mortgage payment could ever become worth $34 billion dollars,” he explained.
“But yes in the sense that even in the very early days Marc Ewing and I could see how we might double the size of our small business, and once there double it again.
“After a couple of beers we’d ask how big could this thing get?”
The Open Source revolution
Tux, as originally drawn as raster image by Larry Ewing in 1996. (Source: Wikipedia)
Young and Ewing launched Red Hat from Durham where Ewing had an apartment with big ideas for utilizing the still-emerging world of Open Source. Coders worked together in a non-proprietary environment to develop software and services that ultimately led to Red Hat Enterprise Linux and software to run cloud computing.
For years, Red Hat fueded with Microsoft and Bill Gates, the Borg of big tech at the time. However, the Hatters have been working with IBM for two decades. Only in recent times have Red Hat and Microsoft drawn closer.
Red Hat brings to IBM strength beyond the cloud. RHEL as it is called has tremendous marketshare in the world’s financial centers, from Wall Street to Fleet Street and beyond. And IBM’s expertise in running mixed operating systems, or so-called hybrid clouds, has Rometty seeing an IBM-Red Hat cloud combo challenging titan Amazon Web Services, or AWS, and Microsoft.
“Considering Red Hat consisted of delivering a value to the technology world no one else was offering, we could not see the limits to growth of the Open Source movement,” Young recalls.
“Of course, the next morning we thought that this inability to see the limits to growth was because of the beer.
“In fact, today it appears that there simply are no limits to the growth of what is simply a better way to develop and deploy technology.”
No shares left
Young speaks without a profit to make from Red Hat. He no longer owns any Red Hat shares – he sold out long ago after helping Red Hat go public in 1999 at the height of the “dot com” boom –
That initial public offering, or IPO, of $84 million (6 million shares at $14, according to Red Hat’s history) was huge news at the time – a big offering for the Triangle where the high tech sector was a far cry from what it has become.
Red Hat, IBM execs pledge: ‘We’re not talking about layoffs’
But the dot com frenzy sent Red Hat shares skyrocketing to more than $211 by December. Red Hat then declared a stock split.
It’s taken a long time to return to that lofty height of value yet the Hatters have pulled off a remarkable success story.
Asked if he had any regrets about selling his shares, Young had a ready answer.
“None,” he replied.
“The success of Red Hat has allowed me to launch all sorts of fun and worthwhile projects. From Lulu to PrecisionHawk, the Raleigh-based drone technology company that is growing rapidly. We joke that one day the world will believe North Carolina’s ‘First in Flight’ refers to PrecisionHawk, not those Ohio brothers’ invention.
“Then there are philanthropic projects we’ve been able to support such as helping fund the creation of the Creative Commons organization and their brilliant work creating open licenses for all sorts of non-software IP, from books to music and more.”
Young a native of Canada, also owns the Hamilton Tiger-Cats franchise in the Canadian Football League.
What a journey it has been for Young and Red Hat – and an interesting journey remains for both the man as well as his legacy.
