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$34 Billion Bet on A Trillion

IBM’s $34 billion acquisition of open-source software developer Red Hat (RHT) is “resetting” the cloud landscape, according to IBM (IBM) CEO Ginni Rometty. Announced on Sunday, the move puts a 60% premium on Red Hat’s Friday closing stock price.

But Rometty sees it as the best way for IBM to capture a greater share of the cloud market in the coming years. Rometty and Red Hat CEO James Whitehurst spoke to Yahoo Finance’s Alexis Christoforous on Monday on the heels of the deal announcement.

“There is a $1 trillion market in front of us emerging, and it’s emerging because clients are going from what we call chapter 1. They’ve moved 20% of their applications to the cloud, but it’s pretty much cost-focused [on] the easy stuff,” Rometty said. “80% is in front of them.”

According to Rometty, many companies still keep the bulk of their computing off of the cloud, and that’s where the potential for IBM’s acquisition of Red Hat comes in.

“This is all about being the leader for the next phase of the cloud,” she said.

Rometty and company are taking a huge risk with its latest move. However, with IBM’s Watson AI platform not holding up as the powerhouse it was expected to be for IBM’s business, jumping headlong into the fight for the cloud isn’t such a crazy bet.

IBM Opens Up

“Businesses, as Ginni said, have started a cloud journey, but the easy stuff has moved,” Red Hat CEO James Whitehurst told Yahoo Finance.

“And now the applications that are left for performance reasons or security reasons, or some particulars with the technology are harder to move, and together we can do that because we both have a heritage in the enterprise, and importantly, we can bring the open source components, IBM brings deep industry vertical expertise and just tremendous scale to be able to help these organizations move these workloads and make them cloud ready.”

When asked whether acquiring Red Hat will make IBM a player in the cloud space, Rometty pushed back, saying that IBM’s cloud is already a $19 billion operation.

“Jim and I have gotten hundreds of messages. [Clients] want an answer to the hybrid cloud that allows them to move workloads around to different clouds, private, on [premises], multiple public [clouds], securely move data — they want a native open source answer to that and that’s what we bring,” she said.

Whether or not IBM can actually catch up with Amazon or Microsoft, though, remains to be seen. As of July, Amazon held more than 30% of the market, while Microsoft controlled 18%, according to an analysis by Canalys.

And there’s no doubt both of those companies are working to capture that same 80% of potential cloud applications that IBM is targeting with the Red Hat acquisition. Still, if the move works out the way Rometty envisions it, bringing on Red Hat could turn IBM into a true competitor for the reigning kinds of the cloud.

IBM’s stock was down more than 3% as of about 3 p.m. on Monday. Red Hat, however, saw its stock price jump more than 45% after news of the acquisition.

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