IBM Acquires Red Hat: What it Means to Banks

IBM announced that it would acquire open source software provider Red Hat for around $33 billion. According to the Wall Street Journal:

"IBM is paying an amount for Red Hat that roughly equals the combined value of all the deals it has done in the past 15 years. The deal’s value represents about 30% of IBM’s current stock-market capitalization. For most of her tenure, IBM CEO Ginni Rometty has tried to shake the rust off the aging tech giant with bets on emerging opportunities such as artificial intelligence and the blockchain, some of which have yet to pay out. With the Red Hat deal, IBM is making a significant gamble on a longtime pillar of its turnaround plans, the business of renting out computing power and software in the cloud."

What Does it Mean for Banks?

What does this acquisition mean to the banking industry? Cornerstone Advisors' Senior Consultant Steve Koenemann weighed in with his analysis:

It was only a matter of time before Red Hat--the largest and, arguably, the most successful open source software company to date--was bought by somebody. Along with other Linux-based operating systems like Ubuntu (about 60% of cloud-based servers, including those in Microsoft’s Azure, run Ubuntu as an OS), Red Hat has made a significant impact on the both the make-up and the direction of cloud-based computing.

These innovative thinkers are taking the initial thoughts from everything in the cloud to perhaps a more realistic (but still to be proven) hybrid model where “compute anywhere” mixes local and cloud-based resources. The combined IBM/Red Hat will not be the first or the only company to push this hybrid cloud concept. Others like Microsoft, VMware and Oracle are pushing this along rapidly as well.

The footprint of Red Hat is much larger than just the software that IBM is acquiring. Being open-sourced, the Red Hat community is able to create forks of the base Red Hat code that carries the open source licensing. Examples include:

  • CentOS. A Linux distribution based essentially on the pure open source Red Hat Linux code, CentOS is freely distributed and community supported, and tends to run one version back from the current Red Hat version. Many companies use CentOS as an OS for local and Web-based computing resources. CentOS (running Apache Web, another open sourced software) is a very commonly deployed Internet-facing Web server.
  • Oracle “Unbreakable” Linux. Red Hat-based, but with key binaries replaced by Oracle (like the kernel), this system supports Red Hat style cloud computing. Oracle offers their own version of a cloud similar to Microsoft’s Azure. Aggressively marketed by Oracle as their platform of choice for the Oracle RDMS, Oracle database releases are first developed in an Oracle Linux environment and then ported to other operating systems Oracle support their RDMS running in/on.

Red Hat and the cloud is impacting banks' core system deployments. Fiserv DNA uses Oracle’s RDMS. If a DNA customer wants to run Oracle on Linux, Red Hat is Fiserv’s default/supported platform for that. It can already run in virtual infrastructure environments like VMware, Hyper-V and clouds (Azure, Oracle, IBM, etc.).

When I left Fiserv, nearly 100% of the new in-house DNA deployments were being done in a virtual environment with most using Red Hat-based Oracle running in VMware and many existing DNA deployments were looking to move in that direction.

Use of Red Hat Linux as a platform for Oracle RDMS and DNA has, for the most part, replaced the use of UNIX (HP-UX, etc.) in many large computing environments, primarily due to the readily available Linux skillsets. Red Hat knowledge is common among Linux-savvy users. The use of Red Hat/VMware for DNA is even starting to replace IBM’s PowerX hardware for Oracle/DNA use in some DNA instances.

From an operational perspective, running Oracle and DNA from the cloud is very similar (identical really) to running it from a remote or co-located data center. No DNA modifications required for single Oracle instance deployments. There are already some FIs that run their DNA test/training environments in the cloud (mostly Azure) and a few with short-range aspirations to move their DNA production environments in that direction.

Red Hat is a good buy for IBM--but not a slam dunk. Many industry analysts view this acquisition as a desperation move by IBM to play catch-up in the cloud market space. They're definitely behind the likes of Amazon, Google, Microsoft and Oracle--so they need to make this work. 

This will be a huge clash of cultures, though. IBM has long had the reputation of being a bunch of stodgy blue suits and the fact that they are so far behind in this pursuit of the cloud speaks volumes about their ability to react quickly to a changing market.

Red Hat, on the other hand, has been built from the ground up as an open source innovator and its open culture is a part of their success. IBM has said that Red Hat will be a standalone business unit and that its leadership team will remain intact. Between the botched announcement and anticipation of being forced to become “big Blue” at some point, they may have their hands full trying to retain all the talent that they will need over the long haul.

Final Word

According to an American Banker article, some large bankers are welcoming the deal. Royal Bank of Canada's group head, technology and operations was quoted as saying:

“With the two organizations working as one, I don’t have to referee between the two of them. I don’t have to think about the transition from one company’s software to the other; I can think of that part of our assembly line being through one. That helps me manage it.”

Considering Steve's comments about the "clash of cultures," and the announcement that Red Hat will be a standalone business, my bet is that it will take some time (make that a lot of time) before the two organizations are "working as one."

Ron Shevlin
Director of Research
Cornerstone Advisors