Industry Voices—Raynovich: Inside IBM's desperation Red Hat move

IBM's move to buy Red Hat for $34 billion doesn't look like a good match for industry analyst Scott Raynovich. (Pixabay)

IBM's move Monday to spend $34 billion on the best open-source technical support company in the world, Red Hat, should only be seen for what it really is: a desperation move by CEO Ginni Rometty to try to keep her job. 

The main problem, as market volatility wreaks havoc on tech stock prices, is that IBM shareholders have seen no gains—at all—in the golden era of cloud growth. A big goose egg. IBM's revenues have been flat for years. And take a look at these stock price moves in the last five years: Microsoft is up 190%, Amazon shares are up 320% and Google is up 100%. IBM? Its shares have fallen 35%.

That's right. Five years ago, IBM's shares were $179. Today they trade near $120.

That is horrendous performance.

Rometty has framed the massive $34 billion Red Hat bet as a strategic pivot. It's bigger than that. As one of the largest tech acquisitions ever, it will consume the entirety of a 100-year-old company's cash—as well put it even deeper into debt—in a bid a to become the leader in hybrid cloud. It's a massive bet requiring the bulk of IBM's balance sheet. Rometty is betting the entire stack.

The IBM CEO is all in. Why not? Given the recent disastrous history of IBM, maybe it's time for a huge bet. And as a strategic moves go, it makes sense. Red Hat has a strong position as the nuts-and-bolts software systems in cloud, with wide market adoption of its Linux distribution in many cloud operations as well as OpenShift, its platform for managing Kubernetes container systems, which have emerged as a de facto standard in the cloud. This is the future. 

RELATED: Raynovich: How SD-WAN could reconfigure enterprise services

But as soon as it's part of IBM, that all changes. 

"Take Red Hat itself," said Rometty. "We have the ability to scale this everywhere. That was Red Hat's biggest constraint: scale and industry expertise."

This is the scariest statement about the merger. Rometty is saying it will come down to IBM's skill in integrating and driving the acquisition. Its track record is grim. 

The move could in fact massively backfire, depending on how it's handled. After all, Red Hat Linux is good for the cloud because it's Swiss. But IBM is less Swiss. It seems more German. Or at least upstate New York-y, which isn't Swiss at all. OK, maybe that analogy is confusing, but the bottom line is that IBM selling you Red Hat is not the same as Red Hat selling Red Hat. IBM is trying to compete with Microsoft and Amazon. Their competitors are not going to like Red Hat as much. 

There is huge execution risk. Then there is the IBM identity crisis—and this only confuses things further. 

Who is IBM? It's hard to know. If you have a weekend to kill and your life is as boring as mine, you could dive into its annual report, which serves up a lot of flash about customers but some grim notes about operating units: IBM has positioned itself as a fast-growing cloud company, but in fact it's just not growing at all. And its business still includes selling financial services and mainframes.

If you watch the IBM commercials during the halftime of NFL games, you're led to believe IBM is the Watson company. The AI company. The funny thing is, there is no big Watson story in the financial reports. Watson is part of IBM's Cognitive Solutions business, which in the 2017 calendar year grew revenue a whopping 1.5%. 

To understand just how confusing and stagnant IBM is, take a look at some of the key business operating units from its 2017 annual report:

• Transaction Processing, which represents revenue of $5.6 billion, grew 0.9% in 2017. 

• Global Business Services had revenue of $16.3 billion but decreased 2.1% as reported from 2016 to 2017. 

• Consulting revenue of $7.2 billion decreased 1%. 

• Technology Services & Cloud Platforms revenue of $34.2 billion decreased 3% as reported. 

• Infrastructure Services revenue of $22.7 billion declined 3.6% as reported.

Just about everything is shrinking. 

You might ask: What are infrastructure services? Which are declining 3.6%? In IBM's language, "the business model is to deliver productivity to clients and then grow by expanding the scope of work and adding new clients to the platform."

I have no idea what that means. But I do know they are trying to talk about growth while it's shrinking.

If you don't believe me that IBM has an identity crisis, pretend that I'm your friend and try to explain to me what exactly it is that IBM does that's relevant to the evolution of the cloud industry.

Think of how some of the other cloud giants have become deeply entwined in your business or personal life. 

My family consumes Apple-generated emojis all day long. I'm forced to fend off Apple's nonstop IOS and iCloud updates more often than my hungry cat. Apple is a lifestyle tech and OS juggernaut that is highly skilled in daily nagging. 

Microsoft is deeply wired into both business and consumers with OSes, business software, and even some useful consumer services. Not an hour goes by where you don't have to touch Microsoft software or download something from its cloud. 

Oracle pays all your bills and keeps track of all your money. 

Can you go a day without using Google? Didn't think so.

Try stopping your family from using Amazon Prime. 

IBM? Name a thing. When did you last have that mission-critical chat with Watson? Where's your password to the Softlayer cloud? 


Holy Linux. I just realized, IBM may be where tech companies go to die. 

It is just too darn complicated and disorganized. Like IBM's financial statements and annual reports. 

This company is a mess, folks. They don't need to buy things, or add things, or integrate things. They need to be broken up. It's like your wife asked you to clean out the garage, and instead you just went down to Costco and bought another garage. For $34 billion. 

I wish the best for Red Hat. But that's a big garage. And once something is swallowed into the IBM garage, you'd better pray for it. 

R. Scott Raynovich is the founder and chief analyst of Futuriom. For two decades, he has been covering a wide range of technology as an editor, analyst, and publisher. Most recently, he was VP of research at, which acquired his previous technology website, Rayno Report, in 2015. Prior to that, he was the editor in chief of Light Reading, where he worked for nine years. Raynovich has also served as investment editor at Red Herring, where he started the New York bureau and helped build the original website. He has won several industry awards, including an Editor & Publisher award for Best Business Blog, and his analysis has been featured by prominent media outlets including NPR, CNBC, The Wall Street Journal, and the San Jose Mercury News. He can be reached at [email protected]; follow him @rayno.

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.