How Red Hat became the tip of the spear for IBM’s rejuvenation strategy

When IBM paid $34 billion to acquire Red Hat in 2018, it was a big bet on a hybrid cloud future, one that appears to be paying off four years after the deal was announced. Over the last couple of quarters, IBM has produced slow but steady single-digit growth, and the positive results were led by the Red Hat business.

Both companies are running in-person conferences with their customers this week in Boston, with IBM Think and Red Hat Summit taking place at the same time.

Red Hat CEO Paul Cormier, who has been with the company for over 20 years, said IBM CEO Arvind Krishna’s plan to transform his company centered around Red Hat and a hybrid cloud strategy. The idea is for his company to use the power of IBM’s size while maintaining Red Hat’s independence.

Krishna described Red Hat as an integral part of the company.

“Red Hat is absolutely essential and core to our strategy, not just the hybrid cloud … I’ll say to our [overall] strategy. Red Hat gives us a platform on which we do two things: One, it is the base of the hybrid cloud because Red Hat runs on the public clouds and it runs on premise and on private clouds. Second, we have taken all the IBM software and optimized it for the Red Hat OpenShift platform, so now it becomes we have written things once and we can deploy them anywhere that a client wants,” Krishna said in a press roundtable yesterday. (OpenShift is RedHat’s container management platform.)

In the most recent quarterly report, IBM revenue grew 8%. That may not seem like a ton of growth, but after almost a decade of negative reports, this is what the company has been looking for. Red Hat was a leading contributor to that result with 18% growth, while the broader hybrid cloud business grew 14%, all good signs for Big Blue.

Bola Rotibi, an analyst at CCS Insight, said that Red Hat is a big part of IBM’s growth strategy and helped push the successful quarter. “Ultimately, IBM has started its fiscal year with solid first-quarter revenue growth on the back of healthy business operations across its reporting segments, but especially with respect to the company’s hybrid cloud and AI operations,” she said.

Cormier said his organization acts as the tip of the spear for IBM’s hybrid strategy. But as he has said in the past, a crucial part of this approach is letting Red Hat behave independently, and that means not playing favorites with IBM when it comes to sales or strategy.