Yesterday, IBM Corp announced its acquisition of Red Hat Inc for $34 billion, as reported by Reuters. This pricing includes any debt the company may have. The goal with this purchase is to expand into new hardware, alongside its consulting offerings, into higher-paying markets. This purchase is IBM’s largest ever.
Ginni Rometty, Chief Executive of IBM, and long been vying to move into new subscription-based models, as competitors like Microsoft and Adobe have moved into. This is, in part, due to waning software sales.
IBM’s market cap is around $114 billion, and the group will pay $190 for every share of Red Hat. This number is 63 percent higher than the closing price on Friday.
Red Hat came to in 1993. The company provides “open source solutions, including reliable, high-performing cloud, virtualization, storage, Linux, mobile, management, and middleware technologies,” according to their website. Linux is an open-source software – one that has nearly broken into the mainstream. Linux intended to compete against closed ecosystems like Microsoft’s and Apple’s.
The group is based in Raleigh, North Carolina. Alongside its traditional offerings, Red Hat charges customers for custom operating system features alongside support and maintenance. With their acquisition, IBM will be taking this revenue in-house.
According to Rometty, Red Hat is one of the only cloud computing companies that is experiencing not only growth but has a decent cash flow as well, she said in an interview with Reuters:
“This acquisition we are clearly doing for growth synergies. This is not about cost synergies at all.
Essentially, IBM’s purchase of Red Hat shows how long-time companies are moving towards acquisitions to continue competing. Cloud computing is a big space for this, as the market consists of customers looking to find the best deal possible. The company that can provide that first will see the most business.
A Worthy Competitor
With Red Hat, IBM believes it can compete with Amazon, Alphabet, Microsoft, and other cloud computing competitors. The acquisition may prove beneficial, as Red Hat’s stock value is up 170 percent regarding the past five years, while IBM’s has been cut near a third of its value in that same timeframe.
Analysts over at Barclays, and online financial services company, reveal that “this deal represents the culmination of IBM’s existing partnership with Red Hat, and, in our view, allows IBM to gain a highly strategic asset to advance its hybrid cloud initiatives.”
However, for that to work, IBM must allow Red Hat to continue as they have been. That means open-source platforms and multiple-cloud offerings must continue.
IBM has been around since 1911. It’s known as “Big Blue” in the tech space, due to the blue computers the company launched with. However, over time, IBM has lost all sorts of revenue as it failed to keep up with emerging trends. That’s looking to change, however.
Not only will the acquisition of Red Hat likely move the company forward, but IBM has also been looking into artificial intelligence, the blockchain, and other emerging technologies to keep it moving forward. The past decade has seen IBM acquire cloud infrastructure developer Softlayer, data from the Weather Channel and software developer Cognos. The first two were for $2 billion, while Cognos was for $5 billion.
IBM claims that CEO Jim Whitehurst and its current management team will still be in charge of Red Hat. However, the company will watch over Red Hat’s headquarters, workspaces, and the rest.
Interestingly, companies like Lazard Ltd, Goldman Sachs Group Inc, and JPMorgan Chase & Co offered legal advice to IBM regarding the deal. That, and some of them even helped to finance it. JPMorgan CEO, Jami Dimon, even made a public statement on the matter:
“Knowing first-hand how important open, hybrid cloud technologies are to helping businesses unlock value, we see the power of bringing these two companies together, and are honored to advise IBM and commit financing for this transaction.”