IBM to acquire open-source software company Red Hat

IBM to acquire Red Hat in $34 billion deal Red Hat to remain ‘distinct unit

IBM is reportedly nearing a deal to acquire Red Hat, the software company valued at $20 billion

IBM has made some big acquisitions over the years, but none have been larger than the $34 billion deal to acquire Linux and cloud technology vendor Red Hat.

IBM predicted the move would accelerate its revenue growth, gross margin and free cash flow within 12 months of closing.

Cloud computing refers to the delivery of computing services, including storage and software, over the internet to achieve economies of scale.

Ginni Rometty, IBM chairman, president and CEO, called the transaction a "game-changer" that seeks to provide companies access to open cloud platforms and expand IBM's collaboration with Red Hat, including the hybrid cloud partnership announced in May. "This is all about resetting the cloud landscape and this is the inflection point to do it". To that end, Red Hat will operate as a distinct unit with IBM's Hybrid Cloud team and will continue to be led by Jim Whitehurst and the current Red Hat management team.

The world runs on Linux.

IBM's stock was down 2 percent on news of the deal, a hint that investors were concerned that, at 10 times 2019 projected sales, it had overpaid for the deal.

A Red Hat logo is pictured on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 29, 2018.

For IBM, Rometty emphasized that Red Hat will help improve multiple aspects of the overall business.

"We are growing faster on the public clouds than the public clouds are growing", Whitehurst said in an interview.

Analysts had raised concerns that the purchase may alienate customers worrying that IBM will infringe on the neutrality of Red Hat, which is dubbed as "Switzerland of the IT stack".

"We expect investor skepticism around the deal given IBM's messaging that it is well underway in its transformation", he said. His conglomerate, Berkshire Hathaway Inc., cut its stake in the company by 94 per cent, while increasing its investment in Apple Inc. "This gives them an asset that looks forward and not backwards". These innovations have become core technologies within IBM's $19 billion hybrid cloud business.

Ms Rometty added that most companies are now being held back in their cloud transformation due to closed platforms.

The deal will see IBM acquire all of the issued and outstanding common shares of Red Hat for $190 (£150) per share in cash.

"This is a very important addition to our existing portfolio, as it lengthens and extends it in a very positive way", Rometty said.

IBM will suspend its share buyback program in 2020 and 2021. Moody's, citing the leverage IBM was taking on, said it was placing the company's credit rating on review. 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.

Red Hat CEO Jim Whitehurst: Why do the deal with IBM?

IBM is no stranger to Linux or to Red Hat.

Because IBM is counting on open source to cement the company's credibility as a cloud player, it's doubtful that the fallout of the acquisition will follow the path of, say, the Oracle acquisition of Sun.

"This is an acquisition for revenue growth, this is not for cost synergies" she said.

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