International Business Machines Corp (IBM) announced that it is acquiring the open-source software company Red Hat for $34 billion.
This transaction is by far IBM’s largest deal ever, and the third-biggest in the history of U.S. tech. Excluding the AOL-Time Warner merger, the only larger deals were the $67 billion merger between Dell and EMC in 2016 and JDS Uniphase’s $41 billion acquisition of optical-component supplier SDL in 2000, just as the dot-com bubble was bursting.
The deal will help IBM expand its reach as an enterprise cloud computing provider.
IBM, which has a market capitalisation of $114 billion, will pay $190 per share in cash for Red Hat, a 63 per cent premium to Friday’s closing share price.
IBM CEO Ginni Rometty focused on the cloud benefits of IBM acquiring Red Hat rather than Linux. According to him “The acquisition of Red Hat is a game-changer. It changes everything about the cloud market. IBM will become the world’s number one hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”
Rometty continued: “Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs. The next 80 percent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales.”
The Red Hat’s CEO Jim Whitehurst said,”Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise”. “Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience, all while preserving our unique culture and unwavering commitment to open source innovation.”
Red Hat describes itself as a leading provider of open source software and services for enterprise customers, focusing on cloud computing and Linux servers, the most popular type of open-source software, which was developed as an alternative to proprietary software made by Microsoft Corp. In 2012, it became the first company providing open-source software to surpass $1 billion in revenue. It will now become a part of IBM’s Hybrid Cloud division.
In its release, IBM says that its services will allow more businesses to shift their operations online, and that the proprietary nature of existing cloud systems means that it’s harder to move and secure data from system to system. “This acquisition we are clearly doing for growth synerg. This is not about cost synergies at all,” Rometty said.
In actual fact IBM is hoping the deal will help it catch up with Amazon.com Inc, Alphabet Inc and Microsoft in the rapidly growing cloud business. IBM shares have lost almost a third of their value in the past five years, while Red Hat shares are up 170 per cent over the same period.
It is not new to the world that IBM is no stranger to acquisitions. It acquired cloud infrastructure provider Softlayer in 2013 for $2 billion, and the Weather Channel’s data assets for more than $2 billion, and the Weather Channel’s data assets for more than $2 billion in 2015. It also acquired Canadian business software maker Cognos in 2008 for $5 billion And now the ongoing acquisition of Red Hat.
The deal between IBM and Red Hat is expected to close in the second half of 2019. IBM said it planned to suspend its share repurchase program in 2020 and 2021 to help pay for the deal.