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International Business Machines Corp (IBM) CEO Ginni Rometty on Acquisition of Red Hat (Transcript)
Oct. 29, 2018 4:17 PM ET | 3 Likes by: SA Transcripts International Business Machines Corp (NYSE:IBM) IBM to Acquire Red Hat Conference Call October 29, 2018 8:30 AM ET
Executives
Patricia Murphy - VP, IR
Ginni Rometty - IBM Chairman, President and CEO
Jim Kavanaugh - IBM SVP, President and CFO
Jim Whitehurst - Red Hat President and CEO
Paul Cormier - Red Hat President, Products & Technologies
Arvind Krishna - IBM SVP, Hybrid Cloud and Director of Research
Analysts
Amit Daryanani - RBC Capital Markets
Katy Huberty - Morgan Stanley
Wamsi Mohan - Bank of America
Toni Sacconaghi - Bernstein
David Grossman - Stifel Financials
John Roy - UBS
Operator
Good morning. Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Today’s conference is being recorded [Operator Instructions].
I will now turn the meeting over to Patricia Murphy with IBM. Ma’am you may begin.
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Patricia Murphy
Thank you, Jill. This is Patricia Murphy, Vice President of Investor Relations for IBM. Thanks for joining us today. We’re here to talk about IBM’s acquisition of Red Hat. We have five senior executives between the two firms on today’s call. In speaking order, we have Ginni Rometty, IBM Chairman, President and CEO; Jim Kavanaugh, IBM Senior Vice President and CFO; Jim Whitehurst, Red Hat President and CEO; Paul Cormier, Red Hat President Products & Technologies; and Arvind Krishna, IBM Senior Vice President and Hybrid-cloud and Director of IBM Research.
During today’s call, we make some statements that are considered forward-looking. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company’s filings with the SEC which you can get from the SEC or from the IBM website
With that, I’ll turn the call over to Ginni Rometty
Ginni Rometty
All right. Thank you, Pat. And I can’t tell you how happy I am to be here today, as is Jim Whitehurst, together both of us to talk to you about this exciting announcement. You now know, as Pat just mentioned, yesterday afternoon, we announced that we would acquire Red Hat, the world’s leading provider of open-cloud solution and the emerging leader in the platform for hybrid-cloud and multi-cloud.
Now, Jim is here with me, we’re both in Raleigh because we’re going to be speaking to employees in a minute, and Arvind are Paul are in Boston to speak to employees there, we are where we need to be and Jim is back in Armonk. So, we are all over the place, we’re going to do this all remotely here with you.
This is clearly IBM's most significant step in the transformation of our offerings and services to lead in high value, and I’m going to keep coming back to how this helps us lead in the high value segment to the industry. The combination of IBM and Red Hat it’s a game changer, I want to keep repeating this is about resetting the cloud landscape, and we will be the undisputed number leader in hybrid-cloud.
So to give that some context, I keep saying this is the second chapter of the cloud and the second chapter of the cloud is about something different, and we’ve been really building our business for this moment. And to lead in the second chapter, this is going to be about hybrid-cloud. In hybrid-cloud is an emerging $1 trillion market. Now, all clients today have
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cloud, I mean look we already have a $19 billion successful cloud business.
But, in Phase 1 is what I call it, the early cloud projects, the easy work as moved, it's mostly is been about productivity, some clients facing out, and as we’ve done surveys not only our own external, clients have move 10% to 20% of their workloads to the cloud. So that’s why I call chapter one 20% mostly cost focus.
But this is an inflection point, and if they’re going to get pass that and move the other 80% which is about all their processes and their data they need what we’re going to offer together, this robust hybrid environment. And so this 80% is I can’t say about them unlocking business value, but I want to put in context, the average clients has a thousand application and the average client already has five -- that we see some as many as many 16 clouds.
They’ve got to move this. They either have to rewrite, refactor, decide what goes where, secure the data. These are inhibitors that stop them from going. So, this is only going to be achieved this move to the 80%, if you can move data and applications across multiple cloud, make that portable and by the way, we just had a big of advisor meeting last week.
And the number one thing they’re saying to us is, hey, we -- these other clouds, they're proprietary. We want an open solution no lock-in. So move it across multiple cloud environments with no lock-in, that's what the two of us do together. By the way we've both been building on that technology. And then they say, it has got to address data security in a multi-cloud environment and then give us a way to manage a multi-cloud environment.
So if I said to address it, they are demanding this open approach. I mean I heard it loud and clear, Jim and I have gotten hundreds of notes from clients, telling us this is the right thing to do. And they want the ability to run a single common platform in all those environments whether it's traditional, virtualized, private all the publics out there. And this open approach is what lets them avoid that lock-in and allows them to move all the apps and data services we're talking about into the cloud environment.
So that's what you see on this chart to us to lead in chapter 2, you got to be hybrid, multi- cloud, open, secure end-to-end in multi-cloud management. Now, we have been building and we have been very focused on hybrid and multi-cloud again based on open technologies. So we've built on containers, Kubernetes, our IBM Cloud platform is growing like crazy, multi-cloud manager was just announced last week from us, and I remind you we have the largest cloud managed services business on the planet. We run more SAP in the cloud than anyone else runs in the cloud as an example.
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But I’m going to pause, I mean what we did was look and we see a scale of a $1 trillion market and we said to ourselves and constantly kept saying. What can we do better to address the needs of our clients? And how do we accelerate our ability to go after that? And knowing and there's really an important point, knowing that Linux is the fastest growing platform out there. And this just this year, it became the number one platform both on-prem and in the cloud. So, it is the starting point in the destination. It is the starting point the destination and we now own both of them.
So we're playing to be the undisputed number one and that is what led us to Red Hat, and Jim is going to get to talk -- Jim Whitehurst in a little bit here. But I want to talk a little bit more about okay, tell me more about why Red Hat here. And so for those of you that do or don't remember, we are a longstanding champion of the Linux and Open Source community, and that started in gosh 20 years ago when we made a $1 billion investment. And ever since we've had a longstanding partnership with Red Hat, and we've been the pioneer with them on Linux and other platforms for the enterprise.
They also bring to us, 8 million plus developers, right. 90% penetration in the Fortune 500 and they are now one of the key foundational technologies of our hybrid-cloud. I hear this from everyone. Hence the starting point. Now, as our clients think about this transition to hybrid and multi-cloud, Red Hat strategic value has only increased. Leveraging their large installed base, the value preposition of its open architecture, they operate across multiple environments which we welcome, right. That's why they've emerged as one of the key foundational technologies for hybrid computing as well.
And so, they have to offer a portfolio open standards including open shift which is our open hybrid-cloud infrastructure. They use open containers, Kubernetes, cloud native development, cloud automation, not to mention if I said their developer system. So and underlying it something I know Jim is going to repeat in a second, it is all about people too and we have great admiration for their people in the business he's built. But it is with a strong understanding of how to both balance and open source culture and then as well scale it in an integrated way.
So for those of you I know you've asked a lot of questions on this, this is over the last year we've been talking about opportunities to work closer and closer because we've been work close together for decades, but how to even accelerate that as we both look at this hybrid opportunity multi-cloud world in front of us. Jim and I shared the same strategic vision, and we have very complementary capabilities.
And so back in April, we I remember well, still too. We had a great lunch about what were
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the strategic alternatives here. And in May we'd have seen as extend that collaboration, if you're watching to the -- and we really were targeting hybrid-cloud adoption. And that led us to really great confidence. I mean we're really testing we were testing, testing that could we go capture this integrate it together and unlock this for both of us. And so that's really what led to this. I mean we work done it for those months since.
And when I look at them, as I've said to everyone and I want to say it you, this accelerates growth across all of IBM. I mean and let me first start with Red Hat on its own as a high value company. And I've said to Jim, you did a great job. Strong growth and highly profitable and generates cash. There are not many companies out there that look like that in this area, but the benefit goes beyond that, and as I said it's going to list all of IBM. So let's take first our own cloud revenue.
I said Linux is the number one operating system on-prem and the destination in the cloud. Number one, this gives us the starting point. We're going to accelerate our own public and private cloud from this not to mention what it does for analytics and data, AI, Watson around that. Because remember, getting all that data together across all these environment in the secured way is our client's number one issue with data in AI.
Second is as clients proceed on this 80% journey I keep talking about, they do need services and help, I just against that to whole day with the board of advisors. So our global business services, they've built the cloud migration factory, they've built cloud garages with thousands of people in these. We have 90,000 cloud architects to accelerate this movement. I mentioned SAP being, we have the most SAP in our cloud by the way we have the most VMWare on our cloud.
Then global technology services, they are the largest cloud managed service, 30% of their backlog is cloud. And systems, ZP Storage all run Linux and it's the fastest growing part of the market. It’s the fastest growing workload on Z by the way on the mainframe. So, I feel like we've built the foundation to be ready for this moment. And so this is great for our clients, that is coming through just to Jim and I loud and clear. And Jim Kavanaugh, my Jim Kavanaugh is going to that take you through the transaction and the financials which you will see just accelerates our high value model.
So let me turn over to Mr. Kavanough, right. So Jim, Jim is in another building. So, I'm signaling over to him.
Jim Kavanaugh
All right, thanks Ginni. What you just heard about is the terrific strategic fit and the
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opportunities opened up by the combination of our two powerful businesses. And now I want to turn to how this accelerates our growth and reinforces our high-value model. But first, let me make a comment on the details of the transaction. Under the terms of the definitive agreement, we'll acquire Red Hat for $190 per share, which reflects an enterprise value of approximately $34 billion net of Red Hat's cash. This is an all cash transaction and will be financed through a combination of cash and debt.
We have also entered into a bridge loan commitment with certain banks that together with cash and other available facilities provides sufficient financial flexibility to complete the transaction. As always, this will be subject to Red Hat shareholder approval, regulatory approvals and other customary closing conditions. And we think right now based on the timing of these reviews, we expect to close in the latter half of 2019. And then post closing, we expect to report the results within the technology services and cloud platform segment. That said, the significant cross selling opportunities like those that Ginni just described, drives value across our entire IBM portfolio.
Red Hat accelerates IBM's revenue growth and our shift to higher value. Red Hat is a premier industry leader with a very attractive financial profile. On its own, it's growing revenue at strong double-digit rate and a similar level of backlog growth. And more importantly, though, it is a high value business, as evidenced by its strong margin and free cash flow generation. And as we integrate these two businesses, the combination is even stronger. It accelerates our top line performance, increasing our revenue growth rate by 200 basis points on a five year CAGR. It accelerates our mix shift to higher value and as a creative to our gross profit margin, and free cash flow in year one, and operating earnings per share by the end of year two.
And finally, then turning the capital allocation. As you all know, we operate with a very disciplined financial policy and are committed to maintaining a strong balance sheet and investment credit ratings. We will continue to provide returns to our shareholders with continued dividend increases. And we expect to get back to our target leverage ratio within a couple years and attend to suspend or share repurchase program in 2020, and 2021.
So, with that, as an overview of the transaction and the financial profile, let me turn it over to Jim Whitehurst, President and CEO of Red Hat.
Jim Whitehurst
Thanks, Jim, and let me also welcome you all on today's call. I'd like to echo what Ginni
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said, and express how excited we are to be joining forces with IBM, truly the most storied technology company in the world. We're thrilled to be able to jointly drive our hybrid-cloud leadership and support the expansion and growth of Red Hat's leading open source technology portfolio. Red Hat is the leading open source software business with a strong core Linux infrastructure business and our broad innovative applications development in emerging technologies that have enabled us to grow for 66 consecutive quarters, in good times and in bad times.
This portfolio of solutions has increased our structure importance with customers as they're all looking to prioritize their digital and cloud transformation initiatives. And this combination not only represents a truly fantastic outcome for our shareholders, but it is a catalyst for Red Hat to drive forward powerfully into the future with that ideal teammate buyer sides.
With IBM we can expect to continue to drive value with our customers specifically, we can leverage IBM scale and resources to enhance the development and continued improvement of our infrastructure, management, automation solutions and cloud native application development. We've talked so long about the really bright opportunity in front of us, and by being able to leverage the power of IBM, its scale, it's depth in customer relationships, it's industry vertical expertise; we're really excited that we can take our growth to a whole new level.
The combine opportunities have significant opportunity to capture cloud data workloads in a rapidly growing hybrid-cloud world. And Red Hat and IBM have been partnered for over 20 years, right, starting with the growth and development of Linux, which is, the foundation for cloud computing. And working closely with IBM overtime and especially as we work to put together this transaction. It was clear that IBM has a deep, deep appreciation for our open source values, our culture and our unique talent and experience.
Another reason why this combination works so well for Red Hat is IBM's long history and commitment and participation in open source communities and a focus on the developer ecosystem. In fact, last month, we were running a survey about who are considered the enterprise open source leaders and IBM and Red Hat were neck and neck, and in fact IBM beat us in several of those categories in the survey. And so, we believe together that we can be the world’s most powerful advocate for open source development.
We look forward to operating as a distinct unit powered by IBM after the close of the transaction and our brands, facilities go-to-market and partner strategies will remain intact. I think that’s really important, right. This is about providing choice and making sure
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customers are not locked in. So, before I turn the call over to Paul for a few comments, I’d like to take a moment to thank our associates. Their dedication and relentless focus on advancing the power of open source technologies is critical to our success both now and certainly in the future.
I’d like to recognize our partners and the open source community. They share our beliefs and our passion for open source as the foundation of digital transformation and modern IT. I know we will continue to make great things together well into the future. And I’m personally so excited about it.
With that, let me turn the call over to Paul Cormier, who expanded our joint ongoing commitment to open.
Paul Cormier
Thanks, Jim. We really look at this as a continuation of what we’ve been doing at Red Hat from the beginning. And we’ve worked with IBM in the open source community from the beginning of what we’ve done in the enterprise have a strong working relationship there. And I think now we just get stronger with that. So we both continue that support in our upstream development as the main development model for us. We really also at Red Hat have been working on our open hybrid-cloud strategy for some time, and the cloud is all about Linux and open source as leaders in Linux in the enterprise.
We’ve been building our portfolio around that for a number of years. Everything, we’ve done from M&A to new products, to existing products has been in that hybrid-cloud model. With this now, we just accelerate that getting that to market. We can get we can solve hybrid-cloud problems for our customers for so many more of our customers than we could hear as a standalone. So, we really look at this as really affirmation of the strategy we’ve been on and really opening that up to a much larger, larger market.
We’ve been dedicated both to working with developers, and we will continue to invest and even increase our investment in open source communities. As open sources, the driver and enterprise, more enterprise solutions are based on more open source that comes from diverse open source communities. And now we open that up as well. And of course, we’re both founding members of the open innovation network. And from a patent perspective, we are much stronger voice together for continued freedom through the open source patent promise. So, that’s another area that we see very, very much working together and really expanding in this space.
So with that, I’ll turn it over to Arvind to continue.
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Arvind Krishna
Thanks, Paul. So I just want to reemphasize a few points that Ginni and Jim and Jim, made and then I’ll come to some of the comments that Paul made. Just to emphasize, we believe that for this next chapter of the cloud journey, hybrid is the answer. The hybrid cloud is the answer that goes across both private cloud and public cloud. Ginni mentioned that most of our clients already have five clouds and many of them have as many as 16 public clouds, so operating in the multi cloud world is critical to focal this journey. It has to be based on open technologies.
As you pointed out, Linux is the number platform for enterprise application, and it has to be done in the secure way with consistent management. So, the world is hybrid, the platform which everyone is embracing for how you move applications to the cloud is based on containers, Kubernetes. Innovation is the only pass forward hope to unlock value from data, whether that AI, or leveraging block chain to fulfill transaction and carry data forward in a secure and process way.
And in the world where cyber security is becoming an even more critical issue, a certified stack all the way up from the metal up is essential for people to feel secure and moving their applications around in a hybrid multi-cloud world, and IBM and Red Hat shares these believes. From my conversations with Paul over the year, I know that this is the common belief held by both of us, and that this is the way forward on an open base, but in a secure way and in a way that all enterprises can across to go forward.
So to talk about the significant benefits that this brings to clients, both Ginni and Jim Whitehurst talked about the benefits for IBM and for Red Hat. But to really talk about the benefit of clients, together IBM and Red Hat can provide this enterprise-grade hybrid cloud with a way to migrate traditional workloads to the cloud. I’ll use two quick clients' examples to do that.
One of our clients in Australia, Westpac has embarked on a hybrid cloud journey. However, the way that they’re doing it right now, they have dramatically improved speed, they believe that 10x faster, but they believe they can get another 10x is that they can get to use a common platform of the type that we are describing.
Another of our clients, American Airlines is already in a multi cloud world, they work in a private cloud, they work on a public, they have a private dedicated cloud, they have pieces sitting in other public clouds, and for them to be able to make this next step forward to say that we can refactor a modernize application at one place, but deploy it we’ll wherever in
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the straight forward way getting rid of complexity, getting rid of difference security and management protocols, brings great value to how they can give a much better digital experience to their clients.
So, I really fundamentally believe that IBM and Red Hat together is the number one hybrid cloud provider for this next journey and the next chapter in the cloud.
Patricia, I’ll hand it back to you.
Patricia Murphy
Thank you, Arvind. So, we’re going to get started on the Q&A and as we do that, I’ll ask you to limit to one question each please. So, Joe, let’s please open it up for questions.
Question-and-Answer Session
Operator
Thank you [Operator Instructions] Our first question is from Amit Daryanani with RBC Capital Markets. Sir, your line is open.
Amit Daryanani
I guess, Ginni, could you just talk about the revenue synergy opportunity that you’ve talked about for IBM over here? And do you think the opportunity is larger; in a, leveraging IBM services, GBS, GTS capabilities to help customers get to the cloud and manage the hybrid cloud environment? Or is it larger, B, in essentially adding on your stack be that Analytics or Watson on top of something OpenShif, for example. Trying to understand where do you think there's a bigger opportunity, and what's the timeline to realize these revenue synergies from here?
Ginni Rometty
And really those are two interesting, and I'm going to add third one to your comment about revenue synergies, because this is all about growth. So, for one thing, just take Red Hat itself. The one you didn't mention is about our ability to scale this everywhere. And so, that's as Jim has said many times, he's like, this is my biggest constraint, right, Jim might say, it's is scale, if I had to say it in word, scale and industry expertise.
So, okay voila, that's one set. But the next one is our own assets, as Jim and Arvind just mentioned about an end-to-an integrated stack that is secure and open. So, that has also for our AI, that is for our -- if you take a look at parts of our middleware our cloud private,
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these are all things on top of that. So, it is a very good opportunity for us to cross-sell if you want to look at it that way and use that then as a distribution. Jim Whitehurst and I, we have two Jim’s here, have talked about this many times. He sees it with the things we offer that clients need that we will integrate on.
And then the third piece of it, it's an excellent opportunity and the third piece of it is around the services team. And this is an issue of -- and again, I just wish as you get into these clients, the easy parts done. And now every client I work with, this is -- they need help. I mean, again, they ask for help on the cloud journey. You're either on a digital journey and/or cloud journey together and thousand apps, as I said, they look at them and they go, okay. Do I shrink wrap this one? Do I break this one into micro services? Do I put this one and rebuild it on the cloud. Oh three clouds. Can I share data across? We go through this with so many clients? And this is why we are scaling up in our services groups on this. And so, GBS does actually call, something called a cloud migration factory, 3, 000 people in it already, they've done 100,000 app migrations through there already.
And then on GTS, our Technology Services, so many clients want to manage. They say okay, 15 clouds, I cannot do this and I can't secure it. So, all three of those are absolute revenue synergies. This is why Jim and -- I mean for us to talk about that, you guys know us, we don't often do that. And we're saying, it is a creative to our revenue 200 basis points CAGR five years, we’re big. And that's not saying accretive to one little piece of IBM, that’s IBM. And so, Jim, why don’t you -- I’m going to ask Mr. Jim Whitehurst let him make one more comments…
James Whitehurst
We are so excited about how just as Red Hat standalone before we think about the other pieces, how much this can expand our business. Just the scale and go to market and the credibility with customers is just can dramatically accelerate our business. And then secondly, the only thing holding back our growth on our container platform is lack of services capability to be able to move applications. And we've been building out our own services capability but it is very small relative to what IBM can bring to the table. So, we are so excited about just those two aspects of this just from our own standalone business. And then there are obviously all the cross portfolio synergies.
Patricia Murphy
Great, terrific. Amit, thanks for the question. Let's go to the next question please, Gill.
Operator
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It comes from Katy Huberty with Morgan Stanley. Your line is open.
Katy Huberty
Thank you and congratulations to all of you on the deal. Ginni, let me ask you a clarification on your last answer and then I have another question. The clarification is, are you willing to now consider selling IBM SaaS offerings like Analytics and Watson on other cloud platforms through the Red Hat stack? Just want to understand if that's the strategy, going forward. And then are you willing to look at the IBM portfolio and consider potential divestitures that could help fund this deal and also accelerate the path to faster growth and higher value? Thank you.
Ginni Rometty
Thank you for seeing it for, it is a strong acquisition. We're so excited about it and the value it brings to clients and to clarify. So, yes, will we put other pieces of IBM, our Analytics, on the Red Hat stack? The answer is absolutely yes. And so, I mean, that is really an important vehicle for distribution of so many things and do it appropriately. There are certain things that belong there, certain things that don’t, but you got it we will. Then the second thing is about divestitures. We don't need to divest anything to fund this, by the way. But I think what this shows you again is we are not shy about making an acquisition we need to make and I am not going to be shy about divesting what we need to divest.
So when we determine it at a time and should be, we will you do not need to fear that at all. And I'd actually -- I mean in honesty, I think our history does prove that when we think it is the right time. In my tenure it's been almost $8 billion of divestitures here. So yes, we're going to use their staff to scale and we will also not be shy about both acquisitions and divestitures.
Patricia Murphy
Great. Thanks, Katy. Gill, can we go the next question please?
Operator
Yes, it's from Wamsi Mohan with Bank of America. Your line is open.
Wamsi Mohan
Yes, thank you, Ginny. Congrats on the deal. It's a big step that can really change your long term revenue growth trajectory. And I think Jim said 200 basis points of incremental
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revenue growth, which is obviously very meaningful. So my question is how are you thinking of the incremental investments to support this growth acceleration. And does that create a temporary pause in PTI growth? And more broadly, does this deal give you a multiplier of growth, not just from IBM Cloud but also gives you a leverage to growth at some of your traditional cloud competitors that that can be a additional revenue boost? Thank you.
Ginni Rometty
So first -- I mean thanks again to all of you guys. And again, we're looking at other analytics out there, not investor analysts but IT analysts are all saying the same thing about being very strong as a partnership here together. And so, a couple of your comments about as I look at the investments. We've already -- this is again -- this is not a cost synergy case, this is a revenue growth case. So we book that in here. I don't necessarily see this. This is again accretive to accelerate our high value model here. So, when you say do I see a hit to our PTI, because of this? No. And -- I mean and just really built a solid business where we booked our investments to keep scaling him. And that is one of the most attractive things about us too, as well as a great partner on this.
And then when you said, is this a way for other parts of IBM to continue to grow. As I think I got there right one be at the very end in there, and that absolutely is. And so, when I was naming just a second ago with the -- when I was naming different parts of our services, those not only can grow, but as well. I got to tell you, our customers view this as a way to extend, as an example, their middleware. So they had middleware portfolios from us that this attaches to. So this is a very important addition to what it is to our existing portfolio that lengthens and extends it in a very positive way. And that's why it's been an important message I've communicated in my video to all IBMers today. This lifts all modes at IBM. There is something in here for every part of IBM and the integrated IBM in addition to our clients, which is why it to me, it is so strong and compelling from both shareholder accretive to our high value model to my clients, A number one, they're the real winner here. The OpenSource community, which guys I'm telling you, this cloud battle is going to be open versus proprietary. And we are going to be the leading open. Clients do not want lock in. And they are sharpening up to this right now. They're actually limiting function they use on other people's clouds saying, if that is not portable, do not touch those functions. You're seeing it happen, big time.
Jim, you and I were talking about how much people are paying and they're recognizing what they're paying. You and I and your Chairman last night, we're talking about when
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they see what they pay on some other clouds, they're like, whoa! stop using that, right? And they want portable. So I mean, this idea that it can extend every part of IBM, we've marched through it, right and things that all of these opportunities to grow. You want to make that comment on…
Jim Whitehurst
Again, I can't speak to overall IBM and that how it rolls through the financials. So what I can say is we have 94% gross margins on subscriptions. So, incremental scale to be able to drop more revenue, that's very, very profitable both in terms of income and cash very, very, very quickly. And so, again, enterprises want hybrid cloud, they do not want to be locked in. They were locked-in in the last generation of technology. They're now equivalent at pouring concrete for the next 20 years with technology. And they want it to be open and they want to have choice. And so this is the time when we can really accelerate into this opportunity. And again, given at least the margins on software from our business, the ability to scale this business, it's a very profitable way to grow.
Ginni Rometty
It's interesting that others chatter the words open on the cloud world. And again, Red Hat runs on a number of clouds, but that's not native. And there's a big difference to clients and what they're able to then both do and secure when you run native. We'll be the native guy. Next ready?
Patricia Murphy
Yes, we're ready. Gill let's take the next question please?
Operator
Our next question is from Toni Sacconaghi with Bernstein. Your line is open.
Toni Sacconaghi
Yes, thank you. Ginni. As you noted, this is a very big and bold move for IBM. I think in the largest acquisition you've done prior to this was Cognos at $5 billion. So, congratulations in the conviction. I'm wondering if you can comment on integration and your confidence in integration, perhaps by telling us about what larger deals IBM has done and you view as successful integrations. And particularly with Red Hat, this challenge maintaining Switzerland like status with partners yet, at the same time, realizing benefits. Is the risk in being more integrated and go to market that you alienate OEM or cloud partners and how
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you plan to manage that? And perhaps you can highlight what specific metrics investors should look to, particularly in the early years, because your CAGR is a five year CAGR. So that's really seven years from now. What should we be looking for in 2019, 2020 to make us confident that the deal is integrating successfully and according to your plans? Thank you.
Ginni Rometty
Okay, Toni, thank you. And actually it is conviction but it's confidence as well. And when you look at all the acquisitions and you know how many we've done in my tenure year, I've done 10s and 10s and 10s of acquisitions. But I will tell you what I've personally done. I have done the biggest ones that were all about culture. And PWC was the only successful integration of a services company, and I personally did it. I understand this so clearly. In fact, it's why I'm at Red Hat today? I could have been any -- I did everything else remotely today, because it is very clear to me what number one is? Number one is the people of Red Hat. And so how do do a culture embed -- this took Jim and I 90 seconds to know what it was, the operating model.
Literally, I don't even think we…
Jim Whitehurst
We had to talk about it…
Ginni Rometty
We do have to talk about, it was obvious. And in that, when I say there are distinct operating units, because we’ve got to preserve absolutely this Switzerland, as you call it. And I will remind you, our technology services and GBS businesses, they are Switzerland in many, many ways. I wish I had more IBM going through them, by the way. I mean, I’m the biggest provider for lots of different products out there.
So this is in our DNA, so distinct units and I’ve been very clear with Jim. He just talked about that digital go-to-market and distribution that go-to-market stay separate. My IBMers, traditional IBMers here, they’re going to be pulling more of this. So this is very clear. So, I want to preserve this brand, this culture. And again given their size, you’re in a number of units around the world, no prob, they’re all staying there that’s why I’m in one of them today. And the go-to-market stays distinct. And so, I think it’s very clear to us on what horizontally stays neutral. And both Jim and I have already committed to all of these other partners, whether it’s Microsoft -- to the everyone, that’s absolutely what has to
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happen and they can have confidence in that.
I mean, Toni, we are ready OpenSource a ton, the two of us are by far the world’s largest OpenSource commuter. And you don’t have to look much further than Hyperledger for Blockchain even on our site. So, it’s one of these things you have to reinforce and people have to say it, they have to see it. But I am very confident that the IBM company and I personally know how to make that an integration work. And Arvind, the hybrid cloud unit, they also understand it very well, because remember we've built all of our hybrid cloud on open technologies. We’ve built them on containers, on Kubernetes. So, this is a kindred spirit between all.
Jim Whitehurst
Yes, one thing I'd emphasize here is, again, we’re staying distinct in our go-to-market. And so, our partners know working with us. They’re working with people who are working with them and are not intended to compete against them. But what this really does, as Ginni talked about. We have 80% of the cloud market to go. And so, this is about helping customers solve their problems. And in doing so, it will create a lot of incremental workload and therefore revenue. And our partners like Microsoft, Amazon, and Google, I think are going to be thrilled because this is more revenue happening for all of us. So, this is about growing up high not moving around the deck chairs in a static environment. So, I think it’s going to be exciting for all of our partners.
Ginni Rometty
And Toni's other question was around metrics and the timing. And we are -- we said in the release your second half of ’19, but this is a complimentary acquisition. We do not see any regulatory inhibitors. So, we are going to close as fast as possible and obviously then update our ’19 when we talk to you about it.
Patricia Murphy
Great. Gill, can we please go to the next question.
Operator
Our next question is from David Grossman from Stifel Financials. Your line is open.
David Grossman
Ginni, you’ve done a very good job of outlining the strategic merits of the deal and the
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longer term impact on IBM’s growth rate. However, can you give us maybe some more specific financial metrics that may help us estimate the incremental revenue synergies associated with leveraging Global Services and IBM software into the Red Hat install base?
Ginni Rometty
Yes. So let me -- so some of the specifics, as you say, for both. You said Global Services, right, David?
David Grossman
Right, and software, I think you mentioned them both.
Ginni Rometty
Yes. And so, I mean, Jim Kavanaugh can jump into. But the point is around, on our software, it is our hybrid cloud. As you know, we have the IBM cloud private and as well, we’ve got a whole IBM cloud private for data, a whole suite of middleware that extends around that. That’s what I was talking about integrating with Jim. And you would have seen -- by the way, you would assume that stuff all returning to growth here in most recent quarter. And then in our Global Services -- both category -- well, I shouldn’t even stop there, by the way, because the question earlier, I think it was Katy that had asked us about the other parts of what we put on to here, right. And that we are going to have our Analytics as well. We just announced you probably didn’t see it, AI OpenScale. This is another thing right on top of this that it says to a client their method lifecycle management of data and life cycle management of models and AI in not just Watson, any kind that goes on top of this.
So we will look for synergies both across that portfolio but as well as across when you said our services, this is to do the modernization of apps. So, we have united single methodology for our clients that again that we were just taking all the IP and the process and the methodologies through with our own Board of Advisors on this that is around GBS and GTS together. It is a one cloud strategy along with contemporary name as Cloud garages around the world and with the migration center, 3,000 people and I think as I said. So, those are the areas that you’ll see that in the revenue in both of those are areas, the managed services side and both the consulting and the application and innovation side, it is at the both sides of it, David.
Patricia Murphy
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Okay, great. We’re running out of the time. Let’s take one more question.
Operator
Thank you. Our last question will be from John Roy with UBS. Your line is open, sir.
John Roy
Thank you. One question there is obviously a lot of overlap on the product portfolios between Red Hat and IBM. And you’re not looking at cost synergies. So, are you looking at essentially keeping both lines and also for future development? Just I want to get an idea of how you’re going to progress going forward more of a Red Hat approach or more of a IBM approach or both?
Jim Whitehurst
Whatever other along those…
Ginni Rometty
You know those overlaps -- you know technology better than the two of us two together. So, there is really hardly any overlaps there that we know. I mean, we’re both the guys that wrote the stuff. So, this just must be a miss perception of what’s out there. So, I feel -- that’s why honestly, otherwise, of course we would deal with that since we had some overlap. We don’t see it…
Jim Whitehurst
I think I would actually flip that around the other way. I think we both talked about hybrid cloud. But what makes this so valuable is that the fact that we don’t have product overlap. And so bringing together we can offer holistic solutions. So if you think -- we both hear say products in hybrid cloud, but we're at different layers of that. And therefore, we come together and we can offer the most compelling solution. But it's because we have complementary products solving a problem around open hybrid multi-cloud. And so that’s where the real value is. You're right. We have overlap in terms of that broad market but not at the product level. And so that’s the beauty of bringing this together as we can offer solutions that can accelerate our customers' businesses.
Ginni Rometty
Look, I think this is the does happen when we use words like hybrid, right. It’s a very big study capabilities is needed. And it’s interesting, because even when we talk about with
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clients on a private cloud fabric and we have one. Actually if you stack them much to each other, they hardly overlap one or other, right. So, they’re actually quite complementary. So, that will always in the detail. So, look I just want to wrap up here. I know want to wrapped up before the market opened up, right. So, if I could just go back -- I think I’m going to recap on a couple of points in that this is about resetting the entire landscape.
I’ve talked to many of you about how does the IBM become the undisputed leader in this new world, chapter two of the cloud is hybrid and we are now going to be one -- number one undisputed leader. This is what you need to know to move these clients. We know this better than anyone in the world to move their mission critical work on a safe journey to the cloud. And it is a world that will be open and multi cloud. So, we will preserve both the Switzerland but we will manage and make this safe in an integrated stack as well with Red Hat here and we now have access to the world's largest developer community.
From a being good for both our shareholders and as well as our own high value model, I just want to reiterate. When we said 200 basis points of revenue to all of IBM CAGR five years, do not think that means its back-end loaded. That's a sign of strength when we're telling you that. So, do not think that that means it's all back end loaded by one in any stretch. And that it just doesn’t by our telling you, year-one free cash flow as well as gross margins accretive. And I want to come back to something we didn't talk about, which is and this is also as well a solid and growing dividend that does not change here. And we know how much that means and we're quite able now to still organic, non-organic, do this, our dividend we're in very good ample financial flexibility here.
So, you're right. In Toni's words, I can't have more greater conviction nor confidence and it is driven -- it is harped by what our clients need. And all you have to do is look at my text messages and my inbox and same for Jim, we've been comparing with each other. This is what clients want and that is always the right place to start. And I think the winner is going to be our client, the industry, our shareholders at the end of the day.
So, I thank you guys for hopping on at the last minute like this. And we look forward too we’re going to close as fast as we can. And we look forward to sharing more and more with you. But this is the right time and we have been shaping IBM for this moment. Thanks guys.
Patricia Murphy
Thanks Ginni. Thanks everybody for joining us. Gill, let me turn it back to you to wrap up.
Operator
19 of 20 10/29/2018, 4:02 PM International Business Machines Corp (IBM) CEO Ginni Rometty on Ac... https://seekingalpha.com/article/4215572-international-business-machine...
Thank you, Ma'am. At this time, we thank you for participating for today's call. The conference has now ended, and you may disconnect at this time.
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