IBM's announcement Sunday of its plans to acquire Red Hat for $34 billion left many commentators reeling from sticker shock.
But now that the surprise has passed, Wall Street is warming up to IBM CEO Ginni Rometty's vision that Red Hat will set up IBM to be the leading provider of hybrid cloud services — storage that processes information across both public cloud offerings and the private, on-premise servers that many large enterprises have used for decades.
In short: There is a big, untapped market of companies that want to move onto the cloud but haven't done it yet, companies that could benefit from a large, hybrid cloud offering.
"IBM is now set to become the world's premier hybrid cloud provider," the BTIG analyst Joel Fishbein wrote, "and with roughly 80% of enterprise workloads yet to be shifted to the cloud, there is still ample market opportunity."
This 80% market opportunity number comes from IBM itself, which said many of its clients had just 20% of their workloads on the cloud.
"They are eager to move their business applications to the cloud, the next chapter of the cloud, the next 80%," wrote IBM's senior vice president of hybrid cloud, Arvind Krishna.
"But to get this full business value from their cloud investments, and to move real business applications to the cloud, they need to be able to move and deploy applications and services between their multiple cloud environments," he said. "Today they are hesitant to do that."
Wall Street buys the story
Notes sent to investors on Monday were supportive of the combination of businesses, though many warned that it could take a while for the two companies to integrate and see a return on their merger.
IBM, which declined in revenue for 22 straight quarters before briefly returning to growth this year, has struggled to gain substantial footing in the cloud, where Amazon Web Services and Microsoft Azure reign supreme.
But analysts think Red Hat could turn that dynamic on its head, eventually.
"Overall, we believe this is a transformative acquisition in hybrid cloud landscape," Barclays' Raimo Lenschow wrote.
Daniel Ives from Wedbush agreed that the acquisition would have wide-reaching ramifications not just for IBM but for the greater cloud space, adding that it could "spark" more M&A in the space over the next six to 12 months.
"In our opinion this was a major shot across the bow from IBM and Rometty to core cloud players such as Amazon (AWS), Microsoft (Azure), and Google (Google Cloud) that there is another player in town that plans to aggressively compete in this massive secular hybrid cloud shift," Ives wrote.
