Tuesday, 20 November, 2018

IBM to Acquire Red Hat for $34 Billion

IBM is seen at the Mobile World Congress in Barcelona Spain IBM is seen at the Mobile World Congress in Barcelona Spain
| 29 October, 2018, 17:29

The deal values the company at $190 a share, a almost 63 percent premium over where the stock traded on Friday, at $116.68. In a press statement, Ginni Rometty, IBM Chairman, President and Chief Executive Officer said, "The acquisition of Red Hat is a game-changer". By effectively buying itself a cloud that spans several IaaS rivals, IBM shows its own IaaS ambitions have dimmed. IBM, meanwhile, has watched its revenue decline in recent years. While things are all status quo for now, big companies do have the tendency to pull the rug from under such projects which, compared to other open source software, often need more resources to serve a large user base. The two companies called the acquisition a logical step after they've worked together for 20 years, saying IBM served as an early supporter of Linux.

IBM shares declined about 5 per cent in early USA trading on Monday.

In that sense, this business strategy could make sense for both companies, or at least for IBM mostly.

IBM announced Sunday that it has struck a deal to acquire the cloud-software company Red Hat for $34 billion. His conglomerate, Berkshire Hathaway Inc., cut its stake in the company by 94 per cent, while increasing its investment in Apple Inc.

With this acquisition, Rometty said IBM will "remain committed" to Red Hat's open governance, open source contributions, participation in the open source community and development model, while also "fostering" its widespread developer ecosystem.

IBM says it intends to keep Red Hat's headquarters in Raleigh. "This gives them an asset that looks forward and not backwards".

At the same time, Red Hat will aim to leverage IBM's hybrid cloud and enterprise IT scale in helping expand open source technology offerings to businesses globally.


Adhering to the adage of not fixing what's not broken, Red Hat will continue to operate as a separate unit.

In an interview with CNBC, however, IBM Chair and CEO Ginni Rometty said IBM didn't pay too steep a price. This is a premium company.

Red Hat is a software company most known for being a distributor of a version of Linux, an open-source operating system that businesses usually use to run data centres. Last quarter the company reported a record 11 contracts valued at over US$5 million each and 73 over US$1 million, according to a note from JMP Securities analyst Greg McDowell. Hell, Red hat is a billion dollar company - yes, billion with a "B".

Paul Cormier, President, Products and Technologies, Red Hat offers the following statement.

It's not immediately obvious to me how the marriage between IBM and Red Hat brings combined value to the market. "This is not about cost synergies at all", Rometty said in the interview.

"This acquisition we are clearly doing for growth synergies".

JPMorgan Chase & Co advised IBM on the deal and provided financing.

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