The IBM-HashiCorp coupling could be more complicated than it seems

When IBM announced its intention to acquire HashiCorp for $6.4 billion on Wednesday at market close, it was easy to conclude that the two companies should fit well together, but a deal comes down to more than strategy. It also comes down to the financials. The question is whether this acquisition holds up to scrutiny along both of these dimensions.

In his meeting with analysts after Wednesday's announcement, IBM CEO Arvind Krishna said he sees HashiCorp as a critical piece of IBM's hybrid cloud management strategy, especially as it relates to generative AI.

“As generative AI deployment accelerates alongside traditional workloads, developers are working with increasingly heterogeneous, dynamic and complex infrastructure strategies," Krishna told analysts. "HashiCorp has a proven track record of helping clients manage the complexity of today's infrastructure by automating, orchestrating and securing hybrid and multi-cloud environments."

IDC analyst Stephen Elliot sees many companies using both Red Hat and HashiCorp infrastructure automation tools already, and putting the two sets of tools together makes sense for IBM. “This deal would lock up IBM’s market leadership and ownership of the Infrastructure as Code market," Elliot told TechCrunch. "Both HashiCorp and Red Hat Ansible are leaders in this segment, as they both have a substantial customer base and solid user adoption."

Perhaps HashiCorp will even perform better as part of a larger company inside a broader portfolio with a much larger sales team. “We think the deal makes strategic sense for both parties, given the complementary nature of HashiCorp’s infrastructure automation tools with IBM’s Red Hat and security offerings,” said William Blair analyst Jason Ader.

But he also sees a company that has been struggling a bit, and Big Blue could ease some of the issues it was having in the marketplace. “We also think that this deal indicates that HCP’s board and management team are fatigued and may believe that a fix to HashiCorp’s issues will be harder or take longer than originally expected,” Ader said.

Ader thinks this includes "difficulties in converting users from HashiCorp’s free open source versions and go-to-market changes being implemented under the new head of sales. Red Hat/IBM could help HashiCorp address these issues because of Red Hat’s proven ability to monetize open source and because of IBM’s broad portfolio of products and customer relationships.”

Constellation Research analyst Holger Mueller isn’t so sure that HashiCorp’s tooling will remain in demand as generative AI begins to take care of scripting in a much more automated way. “At first glance," said Mueiller, "this makes a lot of sense for IBM, providing more multi-cloud capabilities and the chance to sell a lot of services. The challenge will be that GenAI is doing a very good job at writing DevOps and ITOps scripts — so service revenue on top of HashiCorp is going to be challenged in the years to come,” Mueller added. He sees HashiCorp still generating revenue for a number of years, but he’s not sure it justifies the price tag.

Was this a good deal?

And if so, for whom?

Ader’s comment about the deal being a potential boon for HashiCorp is not wrong. In fact, HashiCorp’s numbers paint the picture of a company that is managing to monetize some of its customers well — as evinced by its rising number of $100,000 and greater accounts — but is struggling to grow as a whole.

The company’s growth rate has been in decline for some time. In its fiscal 2024, which concluded January 31, 2024, the company’s growth rate decelerated sharply from 37% in the first quarter of its fiscal 2024, to 26% in the second, to 17% in the third to 15% in the fourth. Certainly, the pace at which growth fell slowed by year’s end, but it was still a painful slowdown at a company that is only so big today. Doubly so when compared to IBM.

Partially driving HashiCorp’s revenue growth comedown was a slipping ability to sell more of its product to existing customers. Net retention fell from 127% in the first quarter of its fiscal 2024 to 124% in the second, to 119% in the third, to 115% in the fourth. Software companies depend on net retention — customers paying more, net, over time — to not only fuel long-term growth, but also to make their sales and marketing costs math out. HashiCorp’s slowing growth rate and its falling net retention rate paint the picture of a public software company that was struggling to land new customers and sell more to its existing accounts, at the pace it wanted to. That’s a double-negative, in growth terms.

Enter IBM, which has a massive customer base and Red Hat aboard. As IDC’s Elliot points out, this could be more than a little synergistic.

The deal is not just about HashiCorp’s recent growth challenges, however. IBM does get a piece of revenue to add to its roster of top line. But with Big Blue reporting $14.5 billion in revenue during its most recent quarter, the $155.8 million that the new company put up in its own most recent quarter is not incredibly impactful. It will matter, though; it is additive, but only so much. Or put another way, IBM is not buying enough growth in the deal to change its own trajectory much.

Strategically, IBM’s choice to go after the multi-cloud space does afford it a chance to be a real player in the cloud without having to compete directly with hyperscalers. Given the sheer financial firepower that Alphabet, Amazon and Microsoft can bring to bear, that makes some sense. At the same time, to see IBM go after a multi-billion-dollar deal that seems to be helpful to both parties did surprise us.

IBM gets to sell the HashiCorp toolkit alongside Red Hat, while HashiCorp gets access to IBM’s massive sales clout, but it's unclear whether Big Blue will get enough additional revenue in the coming years to justify the price tag.