Data Sheet—IBM’s Make or Break Deal for Red Hat

October 30, 2018, 11:33 AM UTC

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IBM made a big move Sunday evening by buying Red Hat for $34 billion. This was the second consecutive business day of great news for North Carolina technology companies, the previous jolt being the new investment in Fortnite maker Epic Games.

That’s about where the good news ends.

Investors hated the all-cash deal, which will force IBM to suspend share re-purchases, increase its debt, and leave the company unable to make other big acquisitions should enterprise software prices ease in coming years. IBM’s shares fell 4%, deepening their embarrassingly negative 7-year run, almost to the day, of the Ginni Rometty era. Even more telling, Red Hat’s shares ended the day near $170, 12% below the $190 per share IBM promised to pay. This means investors are skeptical the deal will happen at this inflated price. (The companies announced IBM will pay Red Hat nearly $1 billion if the deal falls through.)

The deal is make or break for IBM and a maker or breaker for Rometty. She said Sunday the deal will make IBM the “No. 1 hybrid cloud provider,” referring to the market for renting clients online computing services in both “public” and “private” varieties.

Almost no one believes that will happen.

Amazon, Microsoft, and Google dominate cloud computing, with Microsoft having begun to invest years ago in the “hybrid” concept. In fact, Satya Nadella ran Microsoft’s Azure business that pursued the hybrid strategy when he was promoted to CEO. IBM, by contrast, is a pipsqueak in the business, and adding open-source services provider Red Hat won’t meaningfully change that.

The problem is that IBM is late to the game. One longtime enterprise software analyst told me Monday buying Red Hat “only helps the ice cube melt more slowly.” Stratechery’s Ben Thompson called IBM’s previous “commitment to the cloud … an accounting fiction derived from re-classifying existing businesses.” (His takedown of the deal is worth the read to understand IBM strategic quandary.) Breakingviews, which slammed IBM for “overpaying for relevance,” walks through why it is unlikely the deal with ever pencil out financially.

IBM had to do something, of course. Its existing businesses aren’t growing, and even its much-hyped Watson artificial intelligence unit has failed to ignite. Slow growth, flashy marketing that doesn’t deliver, and giant acquisitions. Sound a lot like another stalled icon: GE.

The chances this elephant will dance again aren’t good.


You're just what I needed. The mobile search home page of Google got a makeover to promote links to other content. The new "discover" feature positions a curated list of content below the search box. The choice of new topics and stories is based on the user's web habits. (I'm mostly getting suggested stories about the Red Sox World Series win this morning. Sigh.) Meanwhile, a story that Twitter CEO Jack Dorsey was planning to eliminate the ability to “like,” or favorite tweets blew up across Twitter on Monday, forcing the company to issue a semi-denial. “We are in the early stages of the work and have no plans to share right now.”

It's not the perfume that you wear. In less positive news from Google, a backlash is brewing in the wake of a New York Times story alleging that male senior executives (including Android founder Andy Rubin) left with millions of dollars after being accused of sexual misconduct. A group of about 200 engineers is organizing a “women’s walk” walkout for later this week, BuzzFeed reports. And Intel is declaring that is has reached "full representation" in its workforce three years after making that a top priority. But at 27% female, 9% hispanic, and under 5% black, the employee base is still not representative of the U.S. workforce. Intel says the stat is one of its own devising measuring the make up of workers available in its market. Meeting the target is only a first step on its path to diversity, the company says.

I don't mind you comin' here. How is my favorite note organizing app doing? I'm note sure. Evernote CEO Chris O'Neill, who took over for co-founder Phil Libin in 2015, is departing after "putting Evernote on solid financial footing so we can continue to build for the future." Those are the words of incoming CEO Ian Small, who had run video platform TokBox.

And wastin' all my time. The new $1,300 Hydrogen One phone from high-end camera maker Red arrived on Monday and got some of the worst reviews in recent memory. The phone’s much hyped holographic screen “looks like the entire display has been smudged up when holographic mode kicks in,” The Verge says. “The phone seems misguided and unfinished,” adds PC Magazine “The phone's advertising also lies about its screen being holographic, which makes me really cranky.”

Standin' oh so near. My colleague Phil Wahba has a interesting take on a kind of boring subject. He reports how rental car company Avis plans to survive and thrive in the coming wave of self-driving cars.

(Headline reference explainer video for non-Gen Xers.)


It was a seemingly straightforward deal to bring desirable high tech jobs to Wisconsin. Gov. Scott Walker said the state would give $3 billion of subsidies to Chinese manufacturing titan Foxconn and in return the company would spend $10 billion to build a huge plant making LCD screens in the state and creating 13,000 jobs. But as Bruce Murphy reports for The Verge in a deep dive to follow up on the situation 15 months later, nothing about the deal has been straightforward and the state may end up paying more than $4 billion:

The size of Wisconsin’s subsidy quickly began to grow, as spelled out in state legislation passed about six weeks later and implemented by the Walker administration. By December 2017, the public cost had grown to include $764 million in new tax incentives from local governments in Racine County, which is just 40 minutes south of Milwaukee where the plant was to be located. Other additions included $164 million for road and highway connections built to service the plant, plus $140 million for a new electric transmission line to Foxconn that would be paid for by all 5 million ratepayers of the public utility We Energies. With other small costs added, the total Foxconn subsidy hit $4.1 billion—a stunning $1,774 per household in Wisconsin.

Back when the subsidy was $3 billion, Wisconsin’s non-partisan Legislative Fiscal Bureau estimated that it would take until 2043 for taxpayers to recoup the subsidy. This long payback period was due to Walker and Republicans effectively cutting the state’s corporate income tax for manufacturers to zero in 2011. This meant the subsidies to Foxconn would not be a tax write-off, but billions in cash that would be paid back by state income taxes paid by Foxconn workers. At $4.1 billion, the payback date for the state was likely 2050 or later.


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Some weeks ago, we brought you the stat that hundreds of people have died trying to take selfies. Now comes the sad story of Vishnu Viswanath and Meenakshi Moorthy, the couple who ran the global travel blog Holidays and Happily Ever Afters. Last week, the pair fell to their deaths from Taft Point in Yosemite National Park. In a premonitory post in March, Moorthy wrote on the blog's Instagram account: “A lot of us including yours truly is a fan of daredevilry attempts of standing at the edge of cliffs and skyscrapers, but did you know that wind gusts can be FATAL??? Is our life just worth one photo?”

This edition of Data Sheet was curated by Aaron Pressman. Find past issues, and sign up for other Fortune newsletters.

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