Partners See Potential But Fear IBM’s $34B Acquisition Could ‘Blue Wash’ Red Hat

Solution providers Monday said they see great potential from IBM's $34 billion blockbuster acquisition of Red Hat, but their biggest fear is that Big Blue will derail Red Hat's channel and open-source momentum.

"I am very excited about this deal as a partner," said Chris Pyle, CEO of Boca Raton, Fla.-based Champion Solutions Group, a longtime IBM and Red Hat partner, No. 194 on the 2018 CRN Solution Provider 500. "The modern approach to the way Red Hat looks at the market will be a shot in the arm for IBM. The key is just how will IBM integrate it and leverage it. What IBM has to be careful of is that they don't 'Blue Wash' Red Hat. We are very successful with Red Hat. They have great products and their channel program is very good."

Pyle said the deal fundamentally changes the character of IBM and its position in the hybrid cloud market.

"Red Hat is one of the top distributors of open source. It is a modern type of software distribution whereas IBM has been around a long time and is considered more classic," he said. "This makes IBM more modern. I think the market is going to view it positively. I would just caution IBM to integrate it slowly and not ruin a good thing."

[Related: Ginni Rometty: 5 Reasons Why IBM Is Acquiring Red Hat]

Red Hat, Raleigh, N.C., has said its channel accounts for more than 70 percent of its $2.92 billion in annual sales. Armonk, N.Y.-based IBM, meanwhile, had said at least as of three years ago that just 20 percent of its $81.74 billion in revenue comes from partners.

IBM and Red Hat had not responded at press time with regard to updated figures on the amount of sales going through partners.

Solution providers that have partnerships with both Red Hat and IBM said Big Blue has a distinctly different view of the channel and partners than Red Hat does.

One top executive from a solution provider, who did not want to be identified, said he fears IBM will slow down Red Hat’s channel momentum with its own proprietary services-oriented go-to-market model.

"IBM is a big beast to work with. In some places, we sell their software and they compete with us on the same software," he said. "We have that happening in security right now, where we like their security platform, but you go out and IBM is in there competing with you. It's just a different play from a Red Hat channel perspective because IBM is pretty heavily services-oriented from a go-to-market standpoint. Just look at IBM Global Services."

The executive also said one of Red Hat's key market differentiations is its ability to be nimble. The big question lingering on his mind is whether IBM will be able to keep the open-source specialist agile under the umbrella of IBM.

"There's absolutely a risk that this would impact Red Hat's ability to remain nimble because oftentimes [IBM] isn't," he said. "I definitely see that being a concern. Whether IBM will change that or not, it's uncertain right now. It seems like the big play for them will be to keep Red Hat very open and make it even more appealing to the enterprise because IBM really comes at it from the very large enterprise space."

Another CEO of an IBM and Red Hat partner, who did not want to be identified, said his Red Hat business is growing and his IBM business is flat. "The huge fear is they take something that is frictionless to work with and they encumber it with all the IBM monolithic stuff," said the CEO.

Other solution providers expressed confidence that the deal will prove out to be positive for both companies.

Joe Mertens, the CEO of Sirius Computer Solutions, IBM's largest partner, Red Hat's Innovation Partner of the Year in 2017 and No. 24 on the CRN SP500, said he is confident IBM will successfully pull off the deal, making IBM a bigger force in hybrid cloud and giving Red Hat a bigger slice of the enterprise market.

"It appears to me that IBM is going to leave Red Hat much more standalone – similar to what EMC did when EMC acquired VMware [in 2004]," he said. "Assuming that is the model, I don't think that IBM integration process really happens. I am very optimistic."

Mertens said he sees the blockbuster deal as almost a complete reinvention of IBM around hybrid cloud, with big benefits for both IBM and Red Hat.

"This is really good for both companies," he said. "For Red Hat, it gives them a much higher level of credibility in enterprise-level infrastructure with IBM behind them. For IBM, which has been a big believer in the Linux operating systems and open systems for a long time, it gives them credibility that they aren't a proprietary-focused systems partner. It's certainly a big bet -- and an expensive bet -- for IBM, which says they must really believe in it."

Mertens said IBM had some good offerings in the private cloud market, but not the "strongest set" in the hybrid cloud market. "This Red Hat acquisition greatly improves IBM's market position," he said.

Mertens credited IBM Channel Chief John Teltsch, who has led the charge on a new reenergized IBM partner program, for his "remarkable" work in the IBM channel. "I have a lot of respect for John and his capabilities," said Mertens. "I like him a lot. He is a no BS kind of guy. When you share problems with him, he focuses on them and works to fix them."

In an interview with CRN in August, Teltsch said he's been working to empower solution providers by expanding IBM's partner ecosystem and to make it easier for IBM partners to incorporate its technology into their portfolios.

"We've been looking to simplify the program, our offerings, so a new generation of partners can embed our products in their solutions," Teltsch said.

Some solution providers said the cultural challenges in combining the two companies will be too great for IBM to overcome.

Paul Anderson, CEO of Novacoast, a Santa Barbara, Calif.-based security solution provider standout that is set to break the $100 million mark this year, said he is skeptical that IBM will be able to keep the Red Hat culture intact. "It's inevitable that IBM is going to change how Red Hat does business," he said. "The difference in cultures is IBM suits versus Red Hat sandals. Good luck making that work. That is a monstrous challenge."

Novacoast, a SUSE open-source software pioneer that competes with Red Hat, will use the IBM deal as a call to action to double down on SUSE, said Anderson.

In fact, Anderson expects the IBM -Red Hat deal to have a ripple effect in the Red Hat open-source ecosystem. "That part of the Red Hat ecosystem that was not engaged with SUSE is at least going to give SUSE another look," he said. "This is good for SUSE. You are going to see companies looking to strengthen their relationship with SUSE."

During a conference call with analysts and investors Monday morning, Red Hat CEO James Whitehurst said his company's go-to-market strategy will stay distinct from IBM's.

"Our partners know that when working with us, they're working with people who are working with them and are not incented to compete against them," said Whitehurst. "This is about helping customers solve their problems and in doing so, it will create a lot of incremental workload and therefore revenue. Our partners like Microsoft, Amazon and Google I think are going to be thrilled because this is more revenue happening for all of us. This is about growing a pie, not moving around the deck chairs in a static environment. I think it's going to be exciting for all of our partners."

According to Whitehurst, Red Hat will operate as a distinct business unit with its brand, facilities, go-to-market and partner strategies remaining intact after finalization of the deal, expected to close in the second half of 2019.

IBM CEO Ginni Rometty said her company will "absolutely preserve" both Red Hat and IBM's “Switzerland”-type technology model.

"Our technology services and [Global Business Services] businesses, they are Switzerland in many, many ways. I wish I had more IBM going through them, by the way. I'm the biggest provider for a lot of different products out there. This is in our DNA," said Rometty. "I've been very clear with [Whitehurst] … that [Red Hat's] go-to-market stays separate."

IBM shares were down $5.03, or 4 percent, in trading late afternoon Monday, hitting a new 52-week low of $119.63. Red Hat shares, meanwhile, surged 45 percent, or $52.42, to $169.21, based on the $190 per share IBM expects to pay for Red Hat.

The combined company has the potential to become the industry hybrid cloud market leader, said Champion Solutions Group’s Pyle. "If IBM does it right and they are smart about it, this will help the entire industry and have partners cheering, 'Thank God, Red Hat has now got a big brother behind open source that can make it an even bigger force in the enterprise and the channel.'"

If IBM wants a role model in how to make open source a bigger and more powerful force in the enterprise, it should look no further than Microsoft and Microsoft CEO Satya Nadella, said Pyle.

"Microsoft bought GitHub and LinkedIn. They are encouraging open source," said Pyle. "More open source runs in Azure than Windows. What you see is Satya and the whole Microsoft channel embracing open source."

Pyle said Red Hat has been an open-source channel stalwart with outstanding products, including its OpenShift container application. "Red Hat has been a big supporter of the open-source enterprise opportunity. There are a lot of challenging things that happen in the open-source environment. Red Hat has standardized open source, ensuring that it is secure and stable."

Pyle, who is also an IBM shareholder, applauded Rometty for making a blockbuster strategic deal rather than returning cash to shareholders. "This is a really great move by IBM," he said. "For them to make this acquisition speaks volumes."

Pyle's message to Rometty: "Congratulations on putting the company's capital to work. Listen to the CEO you just acquired."