The IBM-HashiCorp tie-up could be more complicated than it seems

When IBM announced this Given its intention to acquire HashiCorp for $6.4 billion at market close on Wednesday, it was easy to conclude that the two companies would be a good fit, but a deal comes down to more than just strategy. It also comes down to finances. The question is whether this acquisition can withstand the test of both dimensions.

During his meeting with analysts after Wednesday's announcement, IBM CEO Arvind Kirshna saw HashiCorp as a crucial part of IBM's hybrid cloud management strategy, especially as it relates to generative AI.

“As the implementation of generative AI accelerates alongside traditional workloads, developers are working with increasingly heterogeneous, dynamic and complex infrastructure strategies. HashiCorp has a proven track record of helping customers manage the complexity of today's infrastructure by automating, orchestrating and securing hybrid and multi-cloud environments,” Krishna told analysts.

IDC analyst Stephen Elliot sees many companies already using Red Hat and HashiCorp infrastructure automation tools, and bringing the two sets of tools together makes sense for IBM. “This deal would lock in IBM's market leadership and ownership of the Infrastructure as Code market. Both Hashicorp and Red Hat Ansible are leaders in this segment as they both have substantial customer bases and solid user adoption,” Elliot told JS.

Perhaps HashiCorp will even perform better as part of a larger company within a broader portfolio with a much larger sales force. “We believe the deal makes strategic sense for both parties given the complementary nature of HashiCorp's infrastructure automation tools with IBM's Red Hat and security offerings,” said William Blair analyst Jason Ader.

But he also sees a company that's struggling a bit, and Big Blue could alleviate some of the market's problems. “We also believe this deal indicates that HCP's board and management team are fatigued and believe that a resolution to HashiCorp's problems will be more difficult or take longer than originally anticipated,” he said.

“This includes issues converting users from HashiCorp's free open source versions and go-to-market changes being implemented under the new head of sales. Red Hat/IBM could help HashiCorp address these issues because of Red Hat's proven ability to monetize open source and because of IBM's broad portfolio of products and customer relationships.”

Constellation Research analyst Holger Mueller isn't so sure there will continue to be demand for HashiCorp's tools as generative AI takes care of scripting in a much more automated way. “On the face of it, this makes a lot of sense for IBM because it offers more multi-cloud capabilities and the opportunity to sell a lot of services. The challenge will be that GenAI does a very good job of writing DevOps and ITOps scripts – so the service revenue on top of HashiCorp will be tested in the coming years,” he said. He sees HashiCorp generating revenue for several more years, but he's not sure if that justifies the price tag.

Was this a good deal?

And if so, for whom?

Ader's comment that the deal would be a potential boon for HashiCorp is not wrong. In fact, HashiCorp's numbers paint the picture of a company that's managing to monetize some of its customers well — as evidenced by the rising number of $100,000-plus accounts — but struggling to grow as a whole.

The company's growth rate has been slowing for quite some time. In fiscal 2024, which ended January 31, 2024, the company's growth rate slowed sharply from 37% in the first quarter of fiscal 2024, to 26% in the second, from 17% in the third to 15% in the fourth . Sure, the rate of decline slowed toward the end of the year, but it was still a painful slowdown for a company that's only this big today. Doubly so when you compare it to IBM.

HashiCorp's decline in revenue growth was partly caused by its declining ability to sell more products to existing customers. Net retention fell from 127% in the first quarter of fiscal 2024 to 124% in the second, to 119% in the third, to 115% in the fourth. Software companies depend on net retention – customers paying net more over time – to not only drive long-term growth but also to calculate their sales and marketing costs. HashiCorp's slowing growth And The declining net retention rate paints the picture of a publicly traded software company that was struggling to acquire new customers and sell more to its existing accounts at the pace it wanted. That's a double negative, in terms of growth.

Meet IBM, which has a huge customer base and Red Hat on board. As IDC's Elliot notes, this could be more than a little synergistic.

However, the deal isn't just about HashiCorp's recent growth challenges. IBM does get some revenue to add to its list of revenue. But considering Big Blue reported $14.5 billion in revenue during its most recent quarter, the $155.8 million the new company posted in its own most recent quarter isn't incredibly impressive. It will matter though; it is additive, but only to a limited extent. Or put another way, IBM isn't buying enough growth into the deal to change its own trajectory much.

Strategically, IBM's choice to pursue the multi-cloud space gives the company an opportunity to be a true player in the cloud without having to compete directly with hyperscalers. Given the enormous financial firepower that Alphabet, Amazon and Microsoft can bring to bear, that makes sense. At the same time, we were surprised to see IBM pursuing a multi-billion dollar deal that seems mutually beneficial. IBM gets to sell the HashiCorp toolkit alongside Red Hat, while HashiCorp gets access to IBM's massive sales power, but it's unclear whether Big Blue will generate enough additional revenue in the coming years to justify the price tag.

Related Posts

How a school district is using AI to solve its bus driver shortage

The national shortage of school bus drivers has left many students without reliable transportation. In 2023, the number of bus drivers nationwide in elementary schools fell to approximately 192,400, a…

The search for the perfect artificial eye, through the ages

By tar, animal fat and gold threads to paint polymethyl methacrylate, or plexiglass, the nearly 5,000-year journey to perfect prosthetic eyes has been an odyssey through the periodic table. It…

Leave a Reply

Your email address will not be published. Required fields are marked *

You Missed

How a school district is using AI to solve its bus driver shortage

  • May 28, 2024
How a school district is using AI to solve its bus driver shortage

Secret list of reasons why the president could lose revealed

  • May 28, 2024
Secret list of reasons why the president could lose revealed

Gael Monfils interview: Roland Garros, showmanship, Svitolina and Skai

  • May 28, 2024
Gael Monfils interview: Roland Garros, showmanship, Svitolina and Skai

Why I Love My CSA (It's More Than the Weekly Box of Fresh Produce)

  • May 28, 2024
Why I Love My CSA (It's More Than the Weekly Box of Fresh Produce)

DNC will nominate Biden and Harris through virtual proceedings ahead of the convention

  • May 28, 2024
DNC will nominate Biden and Harris through virtual proceedings ahead of the convention

Feeding peanuts to young children may reduce allergy risk: study

  • May 28, 2024
Feeding peanuts to young children may reduce allergy risk: study

Robert De Niro criticizes Trump outside the criminal trial

  • May 28, 2024
Robert De Niro criticizes Trump outside the criminal trial

A newly authenticated Caravaggio painting goes on display in Spain: NPR

  • May 28, 2024
A newly authenticated Caravaggio painting goes on display in Spain: NPR

Best non-gamstop casinos in 2024

  • May 28, 2024
Best non-gamstop casinos in 2024

California Catholic High School Stops Student's MAGA-Style Patriotic Speech (Video) | The Gateway expert

  • May 28, 2024
California Catholic High School Stops Student's MAGA-Style Patriotic Speech (Video) |  The Gateway expert

Air Force vets reveal how a top-secret base left them sick with tumors

  • May 28, 2024
Air Force vets reveal how a top-secret base left them sick with tumors