Where’s the ‘real juice’ in the $34B IBM-Red Hat deal? Jim Whitehurst spells it out

RESEARCH TRIANGLE PARK – If anyone other than IBM Chair and CEO Arvind Krishna has it dead solid perfect about where the “real juice” in the $34 billion takeover of Red Hat two years ago, it’s Jim Whitehurst. Red Hat’s CEO at the time is now president and No. 2 to Krishna. So when Whitehurst spoke to the Morgan Stanley Technology Conference on Monday a lot of people were tuned in.

It’s been made clear by Krishna and predecessor Ginni Rometty that the “cloud” was the primary reason why IBM (NYSE: IBM) paid so much for the Raleigh-based Hatters. Especially “hybrid cloud” – a mix of private and public technologies. And Red Hat’s revenues – not just cloud -are growing. Whitehurst drilled down on the Red Hat revenues in his discussion with Katy Huberty of Morgan Stanley.

“If we look at that business, before IBM made the acquisition, [Red Hat] was growing, call it, mid-teens. It’s now accelerated to high-teens growth. Talk about what you think is driving that acceleration,” Huberty asked.

A portion of his comments as reported by a transcript posted at business news site SeekingAlpha:

“First off, it’s – as we are laying down this next platform that I talked about, enterprises are now leading to bet like mission-critical things on top of this, right? And look, Red Hat is successful. People in technology knew us. But when you go to like Verizon, now landing their 5G mobile kind of edge compute platform, are they really going to trust that to Red Hat, where IBM is a partner that’s been here for 100 years, has been around known to do mission-critical? And so relationships like with Verizon or we did something similar with Airtel in India. We made this big announcement with Schlumberger, where people are building like big next — their business is going forward and betting on it, IBM has a level of credibility and capability certainly to deliver in the field that just makes us a platform that’s more likely to be used. So certainly, just that credibility helps.

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“I think secondly, certainly to sales reach. I mean tens of thousands of salespeople out there kind of talking about it, certainly helps. We also — and this was — going into the acquisition, one of the things that enamored me the most and that we’re laying is, we’re also one of the largest ISVs out there. So landing our software on the Red Hat technology stack helps us land the platform. And we can kind of come back around that. But I think those 3 things, credibility, sales breadth and then kind of the IBM Software stack on the platform have all helped to accelerate. …

“And so all of these things, to me, increase the probability that we are successful winning the platform. And so it’s more multiplicative than it is additive. So I think we’re still in the early days on the additive piece because, for instance, this year was the first year that we’ve kind of been able to jointly plan it to the account level and roll out targets to get all IBM’s accounts for Red Hat and kind of really kind of get that to the level of integration you would want. So I think you will see that continuing growth or benefit in revenue going forward.

“But the real juice in this, to me, is less the additive synergies and more of the probability addition that we win this platform.”