When IBM announced his intention acquire HashiCorp for $6.4 billion at market close Wednesday, it was easy to conclude that the two companies should get along well, but there’s more to a deal than just strategy. It also depends on finances. The question is whether this acquisition stands up to scrutiny along these two dimensions.
In his meeting with analysts after Wednesday’s announcement, IBM CEO Arvind Kirshna considered HashiCorp a critical part of IBM’s hybrid cloud management strategy, particularly as it relates to AI generative.
“As the deployment 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.
Stephen Elliot, an analyst at IDC, notes that many companies already use Red Hat and HashiCorp infrastructure automation tools, and that it makes sense for IBM to combine the two sets of tools. “This agreement would solidify 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 a large customer base and strong user adoption,” Elliot told TechCrunch.
Perhaps HashiCorp will even perform better as part of a larger company within a broader portfolio and a much larger sales team. “We believe the deal makes strategic sense for both parties, given the complementary nature of HashiCorp’s infrastructure automation tools with Red Hat and IBM’s security offerings,” said Jason Ader, analyst. by William Blair.
But he also sees a company that’s having some struggles, and Big Blue could alleviate some of the problems it was having in the market. “We also believe this agreement indicates that HCP’s board and management team are tired and may believe it will be more difficult or longer to resolve HashiCorp’s problems than initially anticipated,” he said. -he declares.
“This includes challenges related to converting users from HashiCorp’s free open source versions and go-to-market changes implemented under the leadership of the new head of sales. Red Hat/IBM could help HashiCorp address these issues through Red Hat’s proven ability to monetize open source and through IBM’s broad portfolio of products and customer relationships.
Holger Mueller, an analyst at Constellation Research, isn’t sure HashiCorp’s tools will remain in demand as generative AI begins to support 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 ability to sell many services. The challenge will be that GenAI does a very good job of scripting DevOps and ITOps – so revenue from services on top of HashiCorp is going to be challenged in the coming years,” he said. He believes HashiCorp will continue to generate revenue for several years, but he’s not sure it justifies the price.
Was it a good deal?
And if so, for whom?
Ader’s comment that the deal is a potential boon for HashiCorp is not untrue. In fact, HashiCorp’s numbers paint a picture of a company that is doing a good job of monetizing some of its customers – as evidenced by its growing number of accounts $100,000 and up – but is struggling to grow as a whole. .
The company’s growth rate has been declining for some time. During its 2024 fiscal year, which ended January 31, 2024, the company’s growth rate decelerated sharply, from 37% in the first quarter of its 2024 fiscal year, to 26% in the second, to 17%. in the third and 15% in the fourth. Certainly, the pace of growth slowed at the end of the year, but it was still a painful slowdown for a company that is now only a limited business. Doubly compared to IBM.
HashiCorp’s declining revenue growth was partly due to a lesser ability to sell more of its products to existing customers. Net retention fell from 127% in the first quarter of its 2024 fiscal year to 124% in the second, 119% in the third and 115% in the fourth. Software companies rely on net retention (customers paying more, net, over time) not only to fuel long-term growth, but also to calculate their sales and marketing costs. HashiCorp’s slowing growth rate And its declining net retention rate paints a picture of a public software company that was struggling to attract new customers and sell more to its existing accounts at the rate it wanted. This is a double negative in terms of growth.
Enter IBM, which has a massive customer base and Red Hat on board. As IDC’s Elliot points out, this could be more than a little synergistic.
However, the deal isn’t just about HashiCorp’s recent growth challenges. IBM gets a revenue share to add to its roster of premium products. But while Big Blue reported $14.5 billion in revenue in its most recent quarter, the $155.8 million the new company invested in its most recent quarter doesn’t have a considerable impact. It will count though; it’s additive, but only to a certain extent. In other words, IBM isn’t buying enough growth in the deal to significantly change its own trajectory.
Strategically, IBM’s choice to tackle the multi-cloud space gives it a chance to be a true cloud player without having to compete directly with hyperscalers. Considering the financial firepower that Alphabet, Amazon, and Microsoft can bring to bear, this makes sense. At the same time, seeing IBM strike a multibillion-dollar deal that appears to be helpful to both parties surprised us. IBM sells the HashiCorp toolkit alongside Red Hat, while HashiCorp has access to IBM’s massive commercial clout, but it’s unclear whether Big Blue will get enough additional revenue in coming years to justify the price.
