The Federal Trade Commission’s focus on IBM’s [NYSE:IBM] acquisition of HashiCorp [NASDAQ:HCP] could be on the overlap between HashiCorp’s Terraform business line and the Red Hat subsidiary of IBM, said two antitrust attorneys and a consultant.

In April, Armonk, New York-based IBM agreed to acquire HashiCorp in a deal valued at USD 6.4bn. HashiCorp is expected to help drive growth for IBM in areas such as its open-source Red Hat business, watsonX, data security, IT automation and consulting, according to the company’s press release.

The FTC issued a second request on 12 July.

The agency will likely investigate both the horizontal and vertical overlap, but the former is more of a concern, said Kara Kuritz, an antitrust partner at Vinson and Elkins. The horizontal concern is that both Terraform and Red Hat provide cloud infrastructure management solutions across multiple platforms, she said.

The question then is whether by adding HashiCorp to its business, does it give IBM too much control of the segment of the cloud-based software market or cloud infrastructure management solution market, according to Roy Illsley, a chief analyst who focuses on cloud and data center technologies at Omdia, a consultancy firm.

Historically, the FTC will investigate deals because there’s a horizontal overlap, Kuritz said. What’s unique about the proposed merger is the difficulty the FTC will have in defining and measuring market share, she noted.

If the FTC can’t point to the market where IBM and HashiCorp could take a controlling share, that could help IBM’s case, Kuritz said. Software downloads are not a good measure of market share, as they can be challenging to track.

Puppet and Chef Software are two competitors in the cloud infrastructure management market, Kuritz said. More broadly, IBM and VMWare are the main players in the monetized cloud-based software market. Meanwhile, SUSE and Mirantis are smaller competitors.

FTC may look to target licensing agreements

The review of the proposed merger between IBM and HashiCorp is expected to be impacted by Broadcom’s [NASDAQ:AVGO] USD 69bn acquisition of VMWare, according to the industry experts. When Broadcom finalized the deal, the company changed the way it licensed VMWare’s software, clients noted, with prices increasing, said Illsley.

“[FTC] didn’t foresee what Broadcom was going to do and what the potential impact it will have on customers, and that might push them into saying we got to get this right,” Illsley said.

“Certainly, prior investigations, as a general matter, will lead to subsequent investigations and if they’re in the same industry,” said Jeffery Oliver, a partner at Baker Botts and former FTC attorney.

The FTC’s scope will not be narrow and “will certainly cover anything that the agency thinks competes with IBM,” he said.

When parties have a second request, it’s always a marathon, Oliver said. The average time with complying to a second request is a little over eight months, according to a recent report by law firm Dechert.

HashiCorp sells several cloud-based products and services, with more than a few of which compete with IBM’s Red Hat products and services, said Oliver. But, to bring a viable claim against the proposed transaction, the FTC will likely have to draw a narrow market around just one or two of the products and services HashiCorp provides, areas where there are perhaps fewer competitors, he said.

IBM a relatively small participant in the cloud business

The vertical concern is that IBM has a cloud platform, and HashiCorp’s Terraform, which operates across multiple cloud platforms, would also work on IBM’s cloud product, said Kuritz. Their inputs are suppliers to each other. However, there shouldn’t be a significant antitrust concern with the vertical overlap because IBM’s cloud business is relatively small, Kuritz said.

Amazon [NASDAQ:AMZN] Web Services, Microsoft’s[NASDAQ:MSFT] Azure or Google’s [NASDAQ:GOOG] Cloud platform dominate the cloud service provider space, market research shows.

Because Red Hat and HashiCorp manage across multiple cloud platforms, the only way there’s a concern from an antitrust perspective with a vertical overlap is by using one of the products to close off competitors, Kuritz said. But that defeats the whole purpose of the product, and because IBM has a relatively small market share among the cloud platform giants, “that would be kind of like shooting themselves in the foot,” she said.

It is expected to take some time for both parties, IBM and HashiCorp, to go through their offering with the FTC, Oliver said.

The primary arguments IBM and HashiCorp could make is that this combination will not actually harm any customers of depriving them a meaningful choice, or that Red Hat and the targeted line of business within HashiCorp don’t do the same thing, Oliver said. The parties can argue that there are plenty of firms out there that do the same thing and that customers still have lots of alternatives, he added.

The parties could also argue that because the technology is open sourced, and that there are zero barriers to entry, anyone else could pick up the same software and rebrand it using open sourcing and run with it, Oliver added. “It’s certainly helpful that it is open source, so they’ll want to argue that,” he said. 

The FTC and IBM declined to respond to requests for comment. In an emailed statement, HashiCorp said that the parties anticipate promptly responding to the request and will continue to collaborate with the agency in its review of the transaction. HashiCorp said it expects the transaction to close by the end of 2024.