IBM closes $34 bn deal to buy Red Hat as part of cloud push

IBM said on Tuesday it closed its $34 billion acquisition of software company Red Hat as part of the aim to enhance its cloud computing business.
IBM HQ
The purchase of Red Hat is the company’s biggest acquisition in its more than 100-year history.

Ginni Rometty, IBM chief executive since 2012, has steered the company toward faster-growing segments such as cloud, software and services and away from traditional hardware products, Reuters reported.

The company, which won approval for the purchase from EU regulators in late June and U.S. regulators in May, agreed to pay $190 a share for Red Hat, representing a 63 percent premium.

Founded in 1993, Red Hat specializes in Linux operating systems, the most popular type of open-source software and an alternative to proprietary software made by Microsoft. IBM has faced years of revenue declines as it transitions from its legacy computer hardware business into new technology products and services.

IBM’s cloud revenue has increased from 4 percent of total revenue in 2013 to 25 percent today. IBM cloud revenue for the 12-month period through the first quarter of this year grew to over $19 billion.

The Red Hat acquisition is expected to contribute approximately two points of compound annual revenue growth to IBM over a five-year period.

Frank Gens, chief analyst at IDC, said: “With the acquisition of Red Hat, and IBM’s commitment to Red Hat’s independence, IBM is well positioned to help enterprises differentiate themselves in their industry by capitalizing on open source in this emerging hybrid and multi-cloud world.”

Red Hat posted revenue of $3.4 billion (+15 percent) in fiscal year 2019 and $934 million (+15 percent) in fiscal first quarter 2020. Red Hat’s subscription revenue rose 15 percent, revenue from application development-related and other emerging technology offerings grew 24 percent and services revenue increased 17 percent in fiscal first quarter 2020.

Red Hat CEO Jim Whitehurst and his management team will remain in place. Jim Whitehurst will join IBM’s senior management team and report to Rometty.

IBM will maintain Red Hat’s headquarters in Raleigh, North Carolina, its facilities, brands and practices and said it operate as a distinct unit within IBM.

The companies said IBM and Red Hat will offer hybrid multicloud platform that will be based on open source technologies, such as Linux and Kubernetes.

IBM’s cloud strategy has focused on helping companies stitch together multiple cloud platforms rather than compete head on with hyperscale cloud providers such as Amazon Web Services, Microsoft and Google.

IBM said Red Hat will continue to build and expand its partnerships, including those with major cloud providers, such as Amazon Web Services, Microsoft Azure, Google Cloud and Alibaba.

Since 2013, IBM’s cloud revenue as a percentage of total revenue has grown six-fold to 25 percent. In the 12 months through the first quarter of 2019, cloud revenue exceeded $19 billion.

IBM said Red Hat is expected to contribute approximately two points of compound annual revenue growth over a five-year period.