IBM is Making a Game Changing Acquisition with Red Hat for $34 Billion

In what one Wall Street analyst called “game changing”, IBM announced over the weekend that it will be purchasing U.S. software company Red Hat Inc. for $34 billion.

IBM will be paying $190 a share in cash for Red Hat and says it plans to suspend its share repurchase program in 2020 and 2021 in order to help pay for the deal. The transaction is expected to close in the second half of 2019.

Founded in 1993, North Carolina-based Red Hat specializes in Linux operating systems and charges fees to its corporate customers for custom features, maintenance and technical support. The transaction will provide IBM with the company’s subscription revenue.

“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” commented Ginni Rometty, IBM Chairman, President and Chief Executive Officer. She also said, “IBM will become the world’s #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”

She 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.”

Jim Whitehurst, President and CEO, Red Hat stated, “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.”

“IBM is committed to being an authentic multi-cloud provider, and we will prioritize the use of Red Hat technology across multiple clouds” said Arvind Krishna, Senior Vice President, IBM Hybrid Cloud. “In doing so, IBM will support open source technology wherever it runs, allowing it to scale significantly within commercial settings around the world.”

“IBM’s commitment to keeping the things that have made Red Hat successful – always thinking about the customer and the open source community first – make this a tremendous opportunity for not only Red Hat but also open source more broadly,” commented Paul Cormier, President, Products and Technologies, Red Hat. “Since the day we decided to bring open source to the enterprise, our mission has remained unchanged. And now, one of the biggest enterprise technology companies on the planet has agreed to partner with us to scale and accelerate our efforts, bringing open source innovation to an even greater swath of the enterprise.”

Many analysts already chimed in with their thoughts with Jeffrey Kvaal of Nomura saying, “We consider Red Hat’s Linux container software OpenShift the key to the deal; it accelerates IBM’s ability to help enterprises migrate workload to and between multiple clouds, including AWS, Google, and Microsoft’s Azure. The deal is pricey.
However, we believe it works both financially and strategically. … This is as transformative as it gets for IBM.”

Wedbush’s Dan Ives said, “This is a “game changing” cloud acquisition that will have wide-reaching ramifications not just for IBM, but across the broader cloud and tech space and could spark an acceleration in M&A over the next 6 to 12 months. In our opinion this was a major shot across the bow from IBM and [CEO Ginni] Rometty to core cloud players such as Amazon (AWS), Microsoft (Azure), and Google (Google Cloud) that there is another player in town that plans to aggressively compete in this massive secular hybrid cloud shift. While it will take some time to see the merits of this deal manifest and the impact on enterprise hybrid cloud competitive deployments in the field with the deal not officially closing till 2H19, we believe the combination of Red Hat and its Linux cloud platform with IBM could represent a formidable cloud behemoth for the coming years.”

KeyBanc’s Arvind Ramnani remarked, “IBM’s acquisition of Red Hat has the potential to shake up the league tables, in a $1T growing cloud market. … This acquisition propels IBM to be a leading hybrid provider. With this elevated profile in the cloud landscape, IBM now offers a more compelling alternative to Amazon, Microsoft, and Google. In our view, its ability to increase its relevance to the enterprise will largely depend on the speed of integration and ability to remain flexible/nimble, and that it doesn’t dilute the offering by bundling offerings with legacy products.”

Disclaimer: We have no position in IBM Common Stock (NYSE: IBM) nor Red Hat Inc. (NYSE: RHT) have not been compensated for this article.