As IBM announced After the company announced its intention to acquire HashiCorp for $6.4 billion at market close on Wednesday, it was easy to conclude that the two companies should be a good fit, but there’s more to the deal than that than just the strategy. It also depends on finances. The question is whether this acquisition stands up to scrutiny on both dimensions.
In his meeting with analysts after the announcement on Wednesday, IBM CEO Arvind Kirshna viewed HashiCorp as a critical part of IBM’s hybrid cloud management strategy, particularly as it relates to generative AI.
“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 address the complexities of today’s infrastructure by automating, orchestrating and securing hybrid and multi-cloud environments,” Krishna told analysts.
IDC analyst Stephen Elliot believes that many companies already use infrastructure automation tools from Red Hat and HashiCorp, and that combining the two sets of tools makes sense for IBM. “This deal would ensure IBM market leadership and ownership of the infrastructure-as-code market. Both Hashicorp and Red Hat Ansible are leaders in this segment as both have extensive customer bases and solid user adoption,” Elliot told TechCrunch.
Perhaps HashiCorp will even perform better as part of a larger company with a broader portfolio and a much larger sales team. “We believe the deal makes strategic sense for both parties as HashiCorp’s infrastructure automation tools complement IBM’s Red Hat and security offerings,” said Jason Ader, an analyst at William Blair.
But he also sees a company that’s struggling a bit, and Big Blue could alleviate some of its problems in the market. “We also believe this deal suggests that HCP’s board and management team are fatigued and may believe that resolving HashiCorp’s problems will be more difficult or take longer than originally anticipated,” he said.
“These include difficulties transitioning users to HashiCorp’s free, open source versions, as well as go-to-market changes being implemented under the new sales director. Red Hat/IBM could help HashiCorp address these issues because of Red Hat’s proven ability to monetize open source and IBM’s broad product portfolio and customer relationships.”
Holger Mueller, an analyst at Constellation Research, isn’t so sure HashiCorp’s tools will continue to be in demand as generative AI begins to take over scripting in a much more automated way. “On the face of it, this makes a lot of sense for IBM as 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 writing DevOps and ITOps scripts – so service revenue on top of HashiCorp will be a challenge in the coming years,” he said. He expects HashiCorp to continue generating revenue for a few years, but isn’t sure if that justifies the price.
Was that a good deal?
And if so, for whom?
Ader’s comment that the deal is a potential boon for HashiCorp is not incorrect. In fact, HashiCorp’s numbers paint a picture of a company that manages to monetize some of its customers well – as evidenced by the increasing number of accounts valued at $100,000 and above – but struggles to grow overall.
The company’s growth rate has been declining for some time. During fiscal 2024, which ended January 31, 2024, the Company’s growth rate slowed significantly from 37% in the first quarter of fiscal 2024 to 26% in the second, to 17% in the third and to 15% in the fourth. To be sure, the pace of growth decline slowed toward year-end, but it was still a painful slowdown for a company only this large today. Compared to IBM, it’s even twice as high.
HashiCorp’s decline in sales growth was due in part to the company’s inability to sell more of its products to existing customers. Net retention decreased from 127% in the first quarter of fiscal 2024 to 124% in the second, to 119% in the third and to 115% in the fourth. Software companies rely on net retention—customers paying more net over time—not only to fuel their long-term growth, but also to calculate their sales and marketing costs. HashiCorp’s slowing growth rate And The declining net retention rate paints a picture of a publicly traded software company that has struggled to acquire new customers and sell more to its existing customers at the pace it desired. That’s a double negative in terms of growth.
Enter IBM, which has a huge customer base and Red Hat on board. As IDC’s Elliot points out, this could be more than just a little synergy.
But the deal isn’t just about HashiCorp’s recent growth challenges. IBM gets a portion of the revenue to add to its top-line growth. But since Big Blue reported $14.5 billion in revenue last quarter, the $155.8 million the new company brought in last quarter isn’t particularly impactful. It will be important though; it is additive, but only so much. Or to put it another way: IBM is not buying enough growth with the deal to significantly change its own development.
Strategically, IBM’s move into multi-cloud represents an opportunity to be a true player in the cloud without having to compete directly with hyperscalers. Given the sheer financial clout that Alphabet, Amazon and Microsoft can muster, that makes perfect sense. At the same time, we were surprised that IBM is pursuing a multi-billion dollar deal that seems to be helpful for both sides. IBM is allowed to sell the HashiCorp toolkit along with Red Hat, while HashiCorp gains access to IBM’s enormous sales power. However, it’s unclear whether Big Blue will generate enough additional revenue in the coming years to justify the price.