On IBM acquiring HashiCorp

On April 24th, 2024, IBM confirmed they are acquiring HashiCorp for $6.4Bn. HashiCorp has a wide reach across the cloud ecosystem, with multiple partnerships and close relationships across all the major cloud service providers. This acquisition presents opportunities and challenges for IBM.

Four core questions arise:

• How has HashiCorp ended up being an acquisition?
• Has the BSL licensing change contributed and what are the implications for OpenTofu?
• Where might IBM position HashiCorp in their portfolio?
• Will the acquisition of HashiCorp help grow IBM Cloud?

To answer these questions, we will look at the HashiCorp customer base, net dollar retention and then look at the possible approaches IBM may adopt.

HashiCorp Subscriber Growth & Net Dollar Retention

HashiCorp is highly dependent on a subset of customers with above $100K ARR. As we noted last year when the HashiCorp relicensed Terraform to the BSL:

Moreover 89% of HashiCorp’s revenue comes from customers with over $100K ARR, who represent just 19% (830 of 4392 customers as of Q1FY24) of their paying customer base. On top of this, revenues are also highly geographically concentrated, with 71% of sales in the United States.

In the subsequent three quarters the level of growth in this $100K+ segment has slowed even further, while the revenue concentration has stayed the same at 89%.

Alongside this HashiCorp’s Net Dollar Retention (NDR) has continued to decline, with a very substantial drop in the last two quarters to 115. While the days of 130+ NDR are in the past for many companies given the wider macro-economic environment, the drop has been exceptionally fast here.

Simply put this is a business with rapidly slowing growth that cannot support its existing valuation, never mind the valuation at IPO. It has been an acquisition target for a while, but the price is still, even with the decline since IPO, relatively high.

However, no one doubts the utility of the products HashiCorp created — Vault and Terraform in particular — are extremely popular offerings, but utility by itself does not translate into enterprise revenue. IBM has enough enterprise relationships to make this acquisition worthwhile.

Terraform, Open ToFu and the BSL

At the time of the BSL change I stated:

It is still too early to see how the move to BSL licenses will play out for HashiCorp

While correlation is not causation, the level of new customer growth, the wider base for the $100K customer funnel, slowed dramatically once Terraform was relicensed, dropping to a low of a 1.5% quarter on quarter growth immediately after the BSL change. It is hard not to conclude that the two events are connected.

Alongside this we have had the recent cease and desist with the OpenTofu project which has undoubtedly led to more negative headlines for, and sentiment towards, HashiCorp overall.

More importantly, as shown above, the NDR numbers have moved from a gradual decline to a much steeper slope. At a time when overall cloud spend is still, despite everything happening, continuing to grow, this would seem to indicate hesitation and churn in the HashiCorp customer base.

Now all of this does lead to a question of what happens next for Terraform? Before OpenTofu there were a lot of rumblings and community pressure for Terraform to move to the Linux Foundation.

IBM has historically had a very strategic approach to open source (their investments in Linux, Eclipse, Node and most recently Kubernetes highlight this). Could there be a route to Terraform and Open Tofu becoming one again?

Where IBM positions HashiCorp internally will be key to this decision.

Positioning HashiCorp in IBM

Update 4/26: a number of IBM employees have reached out privately to comment on the details in the main announcement of HashiCorp remaining a separate division within IBM Software. Given the length of time it will take for the acquisition to complete, and the types of managerial changes that normally ensue during an acquisition, I still feel the scenarios discussed below are more likely in the next 18 to 24 months. I will revisit this again once the aquistion completes.

When IBM acquired Red Hat there were many serious questions raised as to how Red Hat would be allowed to operate. IBM have largely allowed Red Hat to operate as a separate entity, bolstered by additional IBM sales personal and enterprise account reach.

Red Hat has a successful business model, and a track record of moving technologies from acquired companies from an Open Core to Open-Source model, for example what they did with Ansible.

Red Hat, at its heart, had developed into an exceptionally good sales organisation that could take and scale new products across their client base. IBM leaned into this with OpenShift, and now control a significant portion of the Kubernetes market.

HashiCorp is a much smaller entity and is unlikely to be able to be left alone in the manner that Red Hat has been. This leaves us two options:

· Bring HashiCorp into the Red Hat entity.

· Run HashiCorp as part of the IBM Cloud division.

My money is on the former here. Strategically it is a reasonably good fit, Terraform and Ansible combined makes a strong story, the other components work well with the wider Red Hat portfolio. The trick is not to tie HashiCorp into an OpenShift bundle.

The big move, and obvious desire among the wider open source community, is for Terraform to have its license changed back to the MPL-2.0 license. The OpenTofu manifesto would need IBM to go further, donating Terraform to a foundation, such as the Linux Foundation, and agreeing to impartial governance of the project.

If HashiCorp becomes part of IBM Cloud, that is a whole other P&L, with a different set of pressures as we discuss below. The incentive to work with the community to re-license Terraform may not be there.

The other part of the deal, which I have not seen commented on elsewhere, is the value of the data in Terraform Cloud and in the Terraform registry. HashiCorp have a unique view into cloud deployments world-wide, and IBM could, and should, use this data to inform their own strategy.

IBM Cloud?

The other open question is will Hashicorp help drive IBM Cloud adoption. The short answer here is that no, it will not.

The gaps with IBM cloud are well documented, Gartner have placed the offering as a niche player in their IaaS MQs now renamed to MQ for Strategic Cloud Platform Services) for the last five years. While they note a focus on regulated industries, Gartner repeatedly cite reliability issues (2021, 2022, 2023) alongside disjointed architectures, reliability, and poor experience issues (2019, 2020, 2022, 2023). Forrester last placed IBM as a Contender in their 2022 Public Cloud Development and Infrastructure Platforms Wave, but also noted IBM needs to bolster core offerings.

Alongside these criticisms, there is also the question of CapEx. I will leave it to others to provide a deeper analysis of IBMs CapEx, but you can’t be a serious player in cloud without significant CapEx and IBMs own financial reporting shows that it is just not investing here.

At its core HashiCorp has always been an infrastructure compliance and security play, and the one area where IBM Cloud has some potential differentiation is IBM Cloud for Financial Services, but even in that the number of public logos is minimal and dated — all from 2020. However, HashiCorp could easily augment some of the offerings here.

Side note: it is clear reading analyst reports that IBM are focusing a large part of their briefings on cloud to the IBM Cloud for Financial Services offering, hence its frequent mentions. The lack of reference logos does raise questions, but financial services are traditionally more hesitant than most to give public endorsements. That said, the three leading cloud vendors — AWS, Google and Microsoft — all have multiple references in this sector.

Conclusion

The HashiCorp acquisition is a net positive for IBM, however the execution will be key. From the press release it is clear that IBM see Terraform as highly complementary to Ansible, and this will give IBM an end-to-end deployment capability.

Disclaimers

I covered HashiCorp as an industry analyst from 2015 until 2022, at RedMonk and then at Gartner. At Gartner my primary published research touched more on Consul but Terraform and Vault frequently featured in conversations with end user clients. HashiCorp paid for my T&E to several pre-pandemic HashiConf’s.

I covered IBM and Red Hat as an industry analyst from 2015 until 2022, at RedMonk and then at Gartner. OpenShift was a frequent topic of discussion with clients. IBM and Red Hat paid for my T&E to several pre-pandemic events.

I covered the cloud native ecosystem, including the CNCF, as an industry analyst from 2015 to 2022 at RedMonk and Gartner. At Gartner Cloud Foundry, Kubernetes, and the wider Kubernetes ecosystem, including numerous projects and companies associated with the CNCF and the Cloud Foundry Foundation featured in conversations with end user clients. The CNCF, Cloud Foundry Foundation and the Linux Foundation paid for my T&E to a significant number of pre-pandemic events.

Paying for T&E is common practice for analysts attending vendor and foundation events.

The opinions posted in this piece are entirely my own.

Edits

4/25 — updated with clarification on the OpenTofu manifesto following a comment from Ohad Maislish, CEO of env0.

4/26 — clarification on license from a comment by Matt Wilson.