HashiCorp's shares saw a surge of nearly 20% on Tuesday after multiple reports emerged suggesting that IBM was in talks to acquire the cloud software provider. According to anonymous sources cited by The Wall Street Journal, said that a potential deal could be finalized as quickly as within the next few days, although both companies declined to comment on the rumors at that time. Well, just one day later, on Wednesday, IBM announced that it will buy HashiCorp in a deal valued at $6.4 billion, or $35 per share, which represents a 42.6% premium to Monday's closing price. HashiCorp shares rose again on the news, while IBM shares dropped after separately missing revenue consensus for the quarter.
On the call, IBM management argued that the strategic fit of the transaction will significantly strengthen its existing IT automation solutions and extend Red Hat’s platform capabilities. Although HashiCorp is used by over 85% of the F500 and counts more than half a billion downloads, the company derives over two-thirds of its revenue from the US, providing an opportunity to leverage IBM’s wide international base. Barring approval issues, the company expects the deal to close by the end of 2024, with accretive effects to EBITDA in the first full year after completion and to free cash flow in the second year.
HashiCorp has always been popular among developers due to its entry-level open-source freemium model, but it also has sophisticated premium-layered offerings, making it both a DevOps-friendly tool and large-enterprise-worthy. Its software is used by developers in 4,400+ organizations to configure and manage infrastructure in public cloud environments, as well as for their widely used security credentials tool called Vault. Vault can already be integrated on IBM’s SOAR applications as a third-party credential manager. The company is also active in the container orchestration space.
Reacting to the news, it becomes clear how HashiCorp could potentially align with another significant acquisition that IBM once made in the open-source world with Red Hat. In fact, if this goes through, HashiCorp will mark the second-largest acquisition in IBM’s history behind Red Hat ($34 billion). IBM has relied heavily on M&A to build out its cloud software offerings over the past few years, though most deals have been for private, earlier-stage companies as technology tuck-ins.
This alignment, especially in the infrastructure software and container orchestration layers, could pave the way for a successful integration. The inclusion of the popular identity and privileged access management tool, Vault, may just be icing on the cake and a nice call option to get IBM back into the security mix, while the other two areas will drive the majority of synergies.
This acquisition comes as IBM invests in and focuses on the opportunity to implement generative AI within its substantial consulting base to drive more durable long-term growth. The breadth of technology the company continues to build on its cloud platform applications, in concert with winning transformational consulting engagements around LLMs, will be a key to seizing share in this nascent, data-focused field.
On the financial side, IBM grew 2.9% on a constant currency basis in 2023 and expects similar mid-single-digit growth this year. The company’s highest growth software segment, Red Hat, grew an impressive 9% both last year and in the first quarter of this year. Automation software growth of 3.6% lagged total software growth last year, but this quarter showed noticeable improvement, accelerating to 13% y/y growth.
By contrast, HashiCorp is just exiting its high growth phase, growing 22.5% last fiscal year compared with 48.4% in the year prior. Sales growth is expected to decline further this year from ongoing macro uncertainties and an ongoing focus on better cost efficiencies. Adjusted operating margins improved significantly to (13.6%) last year, and HCP has issued 20%+ operating and FCF margin long-term targets. To this end, the company believes it will reach non-GAAP operating breakeven in the final quarter of this fiscal year, and consensus points to Free Cash Flow positivity for the first time this full FY.
In Figure 1 above, we see a data visualization model that shows specific metrics of forward-looking spending intentions and Pervasion for HashiCorp across all sectors within IBM's shared accounts. This data shows us that the shared citation overlap between the two companies has grown solidly to 16% versus just under 10% twelve months ago. In addition, HashiCorp maintains a very healthy Net Score (ETR’s proprietary metric that tracks spending intentions trajectory) in these shared accounts as well, at 39%. It should be noted that Net Score has fallen from 51% to 39% over that same 12-month period.
In another data visualization (Figure 2 below), we isolate to VMware’s accounts within the Infrastructure Software sector and analyze how both Red Hat (Ansible) and HashiCorp are performing. Here, we see that among the 850 customers citing a spending intent on VMware in this sector, Red Hat has an almost 29% shared customer overlap percentage, whereas HashiCorp has about 19% share in that same respondent sample. However, HashiCorp’s spending intentions are materially higher among VMware customers than they are with Red Hat, with a 43% shared Net Score versus 34% for Red Hat. Both are healthy Net Score levels, but HashiCorp’s 40%+ shared Net Score shows particular strength and demonstrates the opportunity to take any share in this market that becomes available due to the VMware acquisition by Broadcom and additional channel partnership turmoil that has happened.
As the data here shows, ETR tracks all three companies with vast data available in multiple sectors across their respective product portfolios. ETR subscribers can log on to the platform directly or jump to the recent APR24 TSIS vendor reports for each that were published just last week. As of the APR24 TSIS publication date of April 19, 2024, ETR held a positive viewpoint on IBM's April 2024 data set and a Negative outlook on HashiCorp's data set. We look forward to the upcoming JUL24 TSIS iteration for second-half 2024 spending intentions and competitive positioning data to see how each company performs.
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Enterprise Technology Research (ETR) is a technology market research firm that leverages proprietary data from our targeted IT decision maker (ITDM) community to provide actionable insights about spending intentions and industry trends. Since 2010, we have worked diligently at achieving one goal: eliminating the need for opinions in enterprise research, which are often formed from incomplete, biased, and statistically insignificant data. Our community of ITDMs represents $1+ trillion in annual IT spend and is positioned to provide best-in-class customer/evaluator perspectives. ETR’s proprietary data and insights from this community empower institutional investors, technology companies, and ITDMs to navigate the complex enterprise technology landscape amid an expanding marketplace. Discover what ETR can do for you at www.etr.ai