Time Sensitive: A Quick Turn on IBM’s Reported Acquisitive Interest in HashiCorp

Okay, I’d better type fast because “unnamed (but familiar and knowledgeable) sources” are up to mischief again. Whenever these anonymous, well-placed chatterboxes leak allegedly impending news to select journalists, especially those employed at high-profile publications of the business press, you know that something is sure to happen, even if the something might initially be nothing. 

In this case, I think we’ll see something rather than nothing, and we’ll probably see it sooner rather than later. That’s why I’m typing fast.

Both the Wall Street Journal and Bloomberg reported yesterday that IBM could announce an intent to acquire HashiCorp as early as today. Given that IBM reports its quarterly results at the conclusion of market trading later today, it’s reasonable to expect that an acquisition announcement might coincide with the company’s release of quarterly results and its post-earnings briefing with Wall Street market watchers. 

Given IBM’s focus on hybrid and multicloud computing, HashiCorp fits the template for an IBM software-infrastructure acquisition. The circumstances and price might also be right. IBM already owns Red Hat, which it acquired for approximately $34 billion back in the carefree pre-COVID times of 2019, but the growth of that franchise has slowed lately, meaning IBM might be ready for another injection of software-based growth hormone. 

As it stands, IBM has been on a voracious acquisition binge, announcing 10 acquisitions in the past year, including a $4.6-billion deal for Apptio as well as lesser (in price) acquisitions of data-integration software companies StreamSets and WebMethods. So, IBM has the temperament for this sort of acquisitive foray, and it also has the means, motive, and opportunity. 

While an announced IBM acquisition of HashiCorp could and probably will happen imminently, leaks by unnamed sources to prominent business publications don’t occur without calculated intent and purpose. In March, Bloomberg reported that “people with knowledge of the matter” divulged that HashiCorp had hired a financial advisor to help evaluate strategic options, which included a potential sale of the company. The report also revealed that HashiCorp had held exploratory talks with prospective buyers. I call your attention to the fact that the last word in the preceding sentence is plural, not singular. 

Allow me to offer the supposition that there is a high degree of probability that the leaks to Bloomberg and the Wall Street Journal are from somebody associated with HashiCorp or in the employ of one of the investment banks acting as a dealmaker. I’m not accusing anybody of malfeasance, you understand, I’m just saying that the reporters at Bloomberg and the Wall Street Journal wouldn’t write these articles if their sources were inveterate gossips who hang out at San Francisco coffee shops. You see, in cases like these, where there’s smoke, somebody has probably purposefully started the fire, pulled the fire alarm, and is waiting for the insurance check to clear. 

When you’re reading these sorts of anonymously sourced articles in major business publications, always ask yourself: Who benefits from this disclosure? Hint, hint: It isn’t IBM, which gains nothing from drawing a competitive bid for HashiCorp.

 Now that the news is out there, the clock is ticking. As a result of these leaks, IBM might pull the proverbial trigger today, for a price premium slightly higher than one that had been under discussion previously. Also, if a deal is announced and is pending, I advise that you closely observe the terms and conditions. There might be a window for another player to make a superseding bid at a sweeter price than IBM’s offer. Similarly, have a look to see whether a breakup fee is specified. That’s another factor that might allow an interloper to make an incursion; if the breakup fee is not prohibitive, the likelihood of such a move increases.

Assessing Other Prospective Buyers

If there is another buyer, who might it be? Cisco Systems, already a significant partner of HashiCorp, must figure on any shortlist. Cisco acquired Cilium/eBPF specialist Isovalent not long ago, which means it might not have strong interest in HashiCorp’s Consul, but Cisco has found Terraform of considerable interest.

The Cisco-HashiCorp partnership is extensive, resulting in integrations involving HashiCorp's infrastructure automation and service networking tools with Cisco's datacenter networking, security, and cloud infrastructure offerings.

Terraform features prominently in the partnership. HashiCorp provides several Terraform providers for Cisco products such as Intersight, ACI, Cisco Multi-Site Orchestrator (MSO), the Cisco Nexus Dashboard Fabric Controller (formerly DNNM), Cisco SD-WAN, Cisco ASA firewalls, Cisco Tetration, and Firewall Management Center (FMC). HashiCorp’s Consul also integrates with Cisco ACI to provide service networking and discovery capabilities for applications deployed on ACI fabrics. HashiCorp's monitoring integration with AppDynamics allows ingesting telemetry data from Consul into AppDynamics for observability That said, Cisco’s acquisition of Isovalent might obviate the need for Consul in service-networking scenarios. 

At the end of March, Cisco reportedly held HashiCorp shares worth $9 million, not exactly a king’s ransom but perhaps more noteworthy by the fact that Cisco was said to have had acquisition talks with HashiCorp in 2019. Cisco also had a strategic investment in Isovalent before making the acquisition. 

Broadcom is another potential acquirer of HashiCorp, though the odds here would be longer. The companies aren’t close partners, and Broadcom has its hands full at present fending off angry VMware customers. That said, Broadcom has a penchant for buying infrastructure software companies and then antagonizing customers aggressive changes to licensing terms and pricing. 

Speaking of antagonized customers, HashiCorp now has a few of those, too, resulting from a change to Terraform’s licensing regimen and the consequent rise of an open-source project. The impetus for OpenTofu, an open-source fork of and alternative to Terraform, was a decision by HashiCorp last summer to change Terraform’s licensing model from an open-source Mozilla Public License to a more exacting Business Source License (BUSL).

HashiCorp and OpenTofu are engaged in an unseemly contretemps, with the former accusing the latter of misappropriating its proprietary code. Standard bearers of the OpenTofu open-source project and other open-source proponents have leapt to OpenTofu’s defense, deeming the allegations unfounded and suggesting that HashiCorp has sullied its reputation in the open-source community.  The potential for further conflict escalation between the two combatants remains, though an acquisition of Terraform by a larger, diplomatically savvy vendor could relegate the mutual recriminations to a historical footnote in the annals of infrastructure software.

Then again, HashiCorp’s truculent response to OpenTofu implicitly suggests that the software vendor views the open-source project as a threat to Terraform’s business prospects. That does not mean that a larger company that might buy HashiCorp wouldn’t be capable of finessing the situation to its advantage, but it strongly suggests that HashiCorp has concerns about the potential damage that OpenTofu could inflict to Terraform’s revenue growth and earnings potential. 

Those circumstances might have become potential negotiating leverage for any potential acquirer. Perhaps it is not a coincidence that HashiCorp began its exploration of strategic alternatives after OpenTofu was launched and put under the auspices of the Linux Foundation. 

A brief summing-up of the discreet disclosures by unnamed but knowledgeable sources: Odds favor an IBM announcement of its intent to acquire HashiCorp later today. If that happens, expect IBM to honor and extend HashiCorp’s partnership with Cisco Systems, which will doubtless seek such assurances from IBM.