The IBM-HashiCorp coupling could be more complicated than it seems | TechCrunch

When IBM announced its intention acquiring hashicorp For $6.4 billion when the market closed on Wednesday, it was easy to conclude that the two companies should fit well together, but a deal matters more than strategy. It also depends on the financial situation. The question is whether this acquisition passes the test on both these dimensions.

In his meeting with analysts following Wednesday’s announcement, IBM CEO Arvind Krishna said he sees HashiCorp as an important part of IBM’s hybrid cloud management strategy, especially as it relates to generative AI.

“As generic AI deployments accelerate alongside traditional workloads, developers are increasingly working with heterogeneous, dynamic and complex infrastructure strategies,” Krishna told analysts. “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.”

IDC analyst Stephen Elliott believes many companies are already using both Red Hat and HashiCorp infrastructure automation tools, and it makes sense for IBM to put the two sets of tools together. “This deal will lock in IBM’s market leadership and ownership of the infrastructure as a code marketplace,” Elliott told TechCrunch. “HashiCorp and Red Hat Ansible are both leaders in this segment, as they both have substantial customer bases and solid user acceptance.”

Perhaps HashiCorp would perform even better as part of a larger company with a larger sales team inside a broader portfolio. “We think this 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 Eder.

But he also sees a company that is struggling a bit, and Big Blue could mitigate some of the problems going on in the market. “We also think this deal indicates that HCP’s board and management team are fatigued and may believe that fixing HashiCorp’s issues will be harder or take longer than originally expected,” Eder said.

Eder believes this includes “difficulties transitioning users away from HashiCorp’s free open source versions and the market changes being implemented under the new head of sales.” “Red Hat/IBM can help HashiCorp address these issues because of Red Hat’s proven ability to monetize open source and IBM’s broad portfolio of products and customer relationships.”

Constellation Research analyst Holger Mueller isn’t sure HashiCorp’s tooling will remain in demand as generative AI begins to take care of the scripting in a much more automated manner. Mueller said, “At first glance, this makes a lot of sense for IBM, providing more multi-cloud capabilities and a chance to sell a lot of services. The challenge will be that GenAI is doing a great job at writing DevOps and ITOps scripts. “So HashiCorp will be challenged on top of service revenue in the coming years,” Mueller said. He sees HashiCorp still generating revenue for many years, but he’s not sure that justifies the price tag. Determines.

Was it a good deal?

And if so, for whom?

Eder’s comments about the deal being a potential boon for HashiCorp are not inaccurate. In fact, HashiCorp’s figures paint a picture of a company that is managing to monetize some of its clients well – as evidenced by the growing number of accounts at $100,000 and over – but is struggling to grow overall. Is struggling for.

The growth rate of the company has been declining for some time. In its fiscal year 2024, which ended on January 31, 2024, the company’s growth rate declined sharply from 37% in the first quarter of its fiscal year 2024, to 26% in the second, 17% in the third, and 15% in the fourth. . Sure, the pace at which growth declined slowed by the end of the year, but it was still a painful recession at a company that’s so big today. This is double that of IBM.

HashiCorp’s decline in revenue growth was partly due to a decline in its ability to sell more of its products to existing customers. Net retention fell from 127% in the first quarter of FY2024 to 124% in the second, 119% in the third and 115% in the fourth. Software companies rely on net retention – customers paying more over time – not only to drive long-term growth, but also to offset their sales and marketing costs. HashiCorp’s growth rate is slowing down And Its declining net retention rate paints a picture of a public software company that was struggling to bring in new customers and upsell to its existing accounts at the pace it wanted. This is double negative from the development point of view.

Enter IBM, which has a huge customer base and includes Red Hat. As IDC’s Elliott points out, it could be a little more synergistic.

However, this deal is not about HashiCorp’s recent growth challenges. IBM gets a share of the revenue for adding to its top-line roster. But while Big Blue reported $14.5 billion in revenue during its most recent quarter, the $155.8 million in revenue the new company made in its most recent quarter isn’t incredibly impressive. However, it will matter; It’s additive, but only so much. Or to put it another way, IBM isn’t buying enough growth into the deal to change its own trajectory.

Strategically, IBM’s choice to go after the multi-cloud space gives it a chance to become a real player in the cloud without competing directly with hyperscalers. Given the financial firepower of Alphabet, Amazon, and Microsoft, this makes some sense. Also, seeing IBM strike a multi-billion dollar deal that appears to be helpful to both parties surprised us.

IBM gets the chance to sell the HashiCorp toolkit with Red Hat, while HashiCorp gets access to IBM’s massive sales clout, but it’s not clear that Big Blue will make enough money to justify the price tag in the coming years. Whether additional revenue will be generated or not.