Source: ForbesIn a move that has broad implications for the cloud infrastructure technology market, IBM announced on its earnings call on April 24th that it is buying cloud technology firm HashiCorp for $35 a share, or $6.4 billion.The move puts to rest HashiCorp’s tumultuous tenure in the public markets and firms up IBM’s leadership position as one of the leading providers of cloud management tools. IBM already owns Red Hat, which it purchased for $34 billion in 2019.But at the same time, the deal also highlights IBM’s challenges to transform itself in a fast-moving industry. Even with the success of Red Hat, whose products are widely deployed and used among cloud engineers, the company had difficulty moving the needle. This was clearly demonstrated on IBM’s earnings call last night, when the company reported revenue grew only 1.5% year-over-year. Its shares fell 9% on a combination of the earnings report and the HashiCorp news.IBM said the HashiCorp deal would be accretive to adjusted earnings before interest, taxes, depreciation, and amortization in the first full year after close and accretive to free cash flow in the second year after close. The company expects the transaction to close by the end of 2024. Dave McJannet, HashiCorp’s CEO, is expected to stay with the company.End of a Rocky Road for HashiCorp The deal puts an end to HashiCorp’s wild ride in the public markets, which may have made investors nauseous. Once a red-hot Silicon Valley startup, the company rocketed out of the gates after its 2021 initial public offering (IPO), hitting a high of near $100 just a month after its IPO. IBM’s purchase price of $35 represents a loss of 65% from those levels more than two years later.In the past year, HashiCorp has also been plagued by controversy. In August of 2021, the company made a big change in its commercialization strategy, switching from open-source licenses to Business Source License (BSL) licensing. This fueled attacks from the open-source community. In December of 2023, founder Mitchell Hashimoto left the company. Hashimoto and current CEO McJannet were said to clash over business strategy.Reflecting on this history, research analyst Jason Ader with William Blair referred in his research note last night that HashiCorp has been put “out to pasture.” But Blair also said the deal makes strategic sense for both companies.“[W] e believe the deal makes a lot of strategic sense for both companies, with IBM buttressing its growing infrastructure software portfolio with popular complementary tools (Terraform, Vault), while HashiCorp will gain access to a seasoned go-to-market motion.”Has HashiCorp Found Business Purgatory? On the plus side for IBM, HashiCorp is considered a leading provider of tools to cloud developers and infrastructure managers. Its infrastructure as code (IaC) product, Terraform, is an industry standard. IaC enables cloud engineers to drive infrastructure automation into cloud applications. HashiCorp’s secrets management product, Vault, is also popular among cloud engineers and is one of the company’s cash cows. Other products such as Consul are not as well known.IBM could well be the perfect home for Hashi, as the company is commonly known in the industry. IBM is regarded as the fourth or fifth largest cloud provider, depending on how you measure it, and its Red Hat division is the crown jewel of cloud management technology. Hashi would be a technical addition to Red Hat which could also be integrated with IaC tools such as Ansible, which IBM also owns (under Red Hat). Red Hat also has a legacy of shepherding open-source tools toward commercialization.Changing IaC LandscapeThe move will also draw a lot of attention from competitors, as it has implications for several large companies in the industry. For example:Networking industry leader Cisco was a strategic investor in HashiCorp before the IPO, and it has long been rumored to be interested in buying HashiCorp. Will it be disappointed? Broadcom last year closed on the $70 billion purchase of VMware, which is a fierce rival of IBM Red Hat. The deal for HashiCorp beefs up IBM’s portfolio of cloud management assets to battle VMware. With HashiCorp losing its independent status, it may shine the light on alternative IaC products, such as the open-source project OpenTofu and startup Pulumi, which are becoming popular alternatives to HashiCorp in the IaC space.One big question is whether HashiCorp can leave controversy behind at IBM. Following its licensing changes, some developers in the open-source community have soured on Hashi. More recently, HashiCorp introduced more conflict in the community by filing a cease-and-desist letter against OpenTofu, a competing open-source IaC product which was created last year as a fork of the original Terraform open-source project after Hashi's licensing changes. Hashi claims OpenTofu had illegally copied open-source code. OpenTofu strongly denies any illegal copying of the code.Industry observers believe the landscape for cloud management products remains open and competitive, and HashiCorp’s exit as an independent entity emphasizes the challenges it is facing.&#34;HashiCorp struggled to execute on open-source commercialization, and eventually turned their back on their heritage with their BSL license last year,” Joe Duffy, founder CEO of IaC company Pulumi, wrote to me in an email. “Hashi's go to market similarly struggled — indeed Pulumi spent a minuscule fraction compared to them this past quarter on sales/marketing, and yet grew customers by more than double, to reach over 2,500 customers (already more than half of Hashi's). We expect this acquisition to accelerate our already fast-growing overtake of HashiCorp on market share.&#34;Others remain skeptical of the potential for HashiCorp at IBM. Chris Wade, the CTO of network infrastructure automation company Itential, points out it has been difficult for independent companies to offer products for multicloud operations because they compete with the hyperscaler cloud providers that provide their own tools.“You can’t underestimate the influence of hyperscalers. The attempts to build a cloud operating model or multicloud strategy is limited as each public cloud provider differentiates and refuses efforts at commodification,” Wade told me in an email. “We are seeing infrastructure consolidation at play as enterprises mature their cloud strategies and merge them with other infrastructure teams. This is just the beginning of consolidation and simplification in the market.”Cloud Infra Competition Ramps UpPut it all together, and it looks like the competition in cloud-management software tools may grow fiercer than ever.IBM has enormous potential to integrate Terraform, as well as HashiCorp’s other products such as Vault and Consul, into its juggernaut Red Hat portfolio, which includes the OpenShift cloud management platform as well as IaC products such as Ansible.Open-source guru Kelsey Hightower (formerly of Google) recently suggested on X (Twitter) that IBM could reverse HashiCorp’s move last year to convert its code to BSL by putting it under Apache 2.0.What if IBM (Red Hat) reverses HashiCorp's Business Source License (BSL) licensing decision and adopts Apache-2.0 instead.— Kelsey Hightower (@kelseyhightower)The purchase by IBM might be the best move HashiCorp could have hoped for. It’s a bittersweet ending for a former engineering darling.William Blair’s Jason Ader summed it up:“While we cannot say we are not a little disappointed with this outcome, we recognize the near-term value creation for shareholders, and there are certainly no guarantees that HashiCorp would have executed a successful turnaround (and accepting this price suggests that management’s confidence in a turnaround was not sky-high).”Bottom line: After years of struggles trying to decode the mystery of commercializing its open-source products, why not hand them over to the pioneer of commercializing open source—Red Hat?

In a move that has broad implications for the cloud infrastructure technology market, IBM announced on its earnings call on April 24th that it is buying cloud technology firm HashiCorp for $35 a share, or $6.4 billion.The move puts to rest HashiCorp’s tumultuous tenure in the public markets and firms up IBM’s leadership position as one of the leading providers of cloud management tools. IBM already owns Red Hat, which it purchased for $34 billion in 2019.

What IBM’s Deal For HashiCorp Means For The Cloud Infra Battle