When IBM announced It would have been easy to conclude that the two companies would work well together after the company announced its intention to buy Hashicorp for $6.4 billion at market close on Wednesday, but the deal comes down to more than strategy. It also has to do with finances. The question is whether this acquisition can withstand scrutiny along both of these dimensions.
IBM CEO Arvind Kirshna, in a meeting with analysts after the announcement Wednesday, saw HashiCorp as an important part of IBM’s hybrid cloud management strategy, especially as it relates to generative AI. Ta.
“As the adoption of generative AI accelerates alongside traditional workloads, developers are grappling with increasingly heterogeneous, dynamic, and complex infrastructure strategies. “We have a proven track record of helping clients manage the complexity of today’s infrastructure by automating, orchestrating, and securing cloud environments,” Krishna told analysts.
IDC analyst Stephen Elliot sees many companies already using infrastructure automation tools from both Red Hat and HashiCorp, and it makes sense for IBM to combine the two tool sets. . “This transaction will solidify IBM’s market leadership and ownership of the Infrastructure as Code market. Hashicorp and Red Hat Ansible both have sizable customer bases and solid user adoption, so It’s a leader in the field,” Elliott told TechCrunch.
Perhaps HashiCorp would perform even better as part of a larger company in a broader portfolio with a larger sales team. “Given the complementary nature of HashiCorp’s infrastructure automation tools and IBM’s Red Hat and security offerings, we believe this partnership makes strategic sense for both parties,” said William Blair analyst Jason Ader. Stated.
But he also sees companies that are struggling a little bit, and he thinks Big Blue could help alleviate some of the problems they’ve had in the market. “This agreement also shows that HCP’s board and management are fatigued and believe that resolving HashiCorp’s problems will be more difficult or take longer than originally anticipated. I think this shows that there is a possibility that
“This includes difficulties in migrating users from HashiCorp’s free and open source version, as well as go-to-market changes being introduced under new sales executives. Red Hat/IBM Red Hat’s proven ability to monetize its products and IBM’s broad product portfolio and customer relationships have the potential to help HashiCorp address these issues.”
Constellation Research analyst Holger Muller isn’t sure demand for HashiCorp’s tools will continue as generative AI begins to handle scripting in a more automated way. “At first glance, this makes a lot of sense for IBM, providing an opportunity to sell more multicloud capabilities and more services.The challenge is that GenAI is very good at writing DevOps and ITOps scripts. So, in addition to HashiCorp, service revenue will be a challenge in the coming years,” he said. He believes HashiCorp will continue to be profitable for many years to come, but he’s not sure if it’s worth the price.
Was this a good deal?
If so, for whom?
Ader is correct in his comments that this deal is a potential boon for HashiCorp. In fact, HashiCorp’s numbers show that while the company has been successful in monetizing some customers, overall it is struggling to grow, as evidenced by the growing number of accounts over $100,000. It represents the appearance of
The company’s growth rate has been declining for some time. For fiscal year 2024, which ended January 31, 2024, the company’s growth rate was 37% in the first quarter of fiscal 2024, 26% in the second quarter, 17% in the third quarter, and 17% in the fourth quarter of fiscal 2024. has sharply slowed down to 15%. True, the pace of decline in growth slowed by the end of the year, but it was still a painful slowdown for a company that is still only a very large company today. Compared to IBM, it’s double.
HashiCorp’s weaker revenue growth was partially caused by a decline in its ability to sell more products to existing customers. Net retention decreased from 127% in the first quarter of 2024 to 124% in the second quarter, 119% in the third quarter and 115% in the fourth quarter. Software companies rely on net retention (customers net more money over time) to drive long-term growth as well as to calculate sales and marketing costs. HashiCorp’s Growth Rate Slows and The decline in net retention rates highlights the struggles of publicly traded software companies to acquire new customers and increase sales to existing accounts at the pace they desire. From a growth perspective, this is a double negative.
Enter IBM, with its huge customer base and Red Hat. As IDC’s Elliott points out, this could have significant synergistic effects.
But the deal isn’t just about HashiCorp’s recent growth challenges. IBM gets a cut of the revenue that it adds to its top-line roster. But Big Blue reported $14.5 billion in revenue in its most recent quarter, so the $155.8 million the new company spent in its most recent quarter isn’t incredibly impactful. However, it is important. It’s additional, but that’s all. In other words, IBM doesn’t see enough growth from this deal to significantly change its trajectory.
Strategically, IBM’s choice to pursue the multicloud space gives it the opportunity to become a true player in the cloud without competing directly with hyperscalers. That makes some sense, given the enormous economic power that Alphabet, Amazon, and Microsoft bring to the table. At the same time, we were surprised to see IBM pursuing a multibillion-dollar deal that appears to be mutually beneficial. IBM will sell the HashiCorp toolkit alongside Red Hat, while HashiCorp will be able to take advantage of IBM’s huge sales power, but Big Blue will have enough additions to justify its price in the coming years. It is unclear whether they will be able to make a profit.
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