IBM buys Red Hat

Under the deal worth $34 billion (€29.8 billion), IBM agreed to acquire all of the issued and outstanding common shares of Red Hat for $190 per share in cash — more than $70 above the $116.68 at which Red Hat was trading at close of business Friday.

The transaction is by far IBM's biggest to date and underscores chief executive Ginni Rometty's efforts to expand the company's subscription-based software offerings, as it faces slowing software sales and waning demand for its computers.

"The acquisition of Red Hat is a game-changer. It changes everything about the cloud market," said Rometty, who is also chairman and president of IBM. "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."

Founded in 1993, Red Hat is one of the very few companies in the cloud computing sector that has both revenue growth and free cash flow. The company's famous version of Linux OS made it the pioneer of the open source movement that arose to counter giants like Microsoft whose models were based on keeping their source code secret.

Small but beautiful

Based in Raleigh, North Carolina, Red Hat runs operations in 35 countries and employs some 12,000 people. It's one of the best-known open-source players whose customers pay for tailor-made solutions. Net profit came in at $259 million last year on revenues of $2.9 billion — up 21 from the previous year.

Under the deal with IBM, Red Hat will continue to be led by its president and chief executive Jim Whitehurst. The CEO will also will join IBM's senior management team and report to Rometty.

"Today is a banner day for open source," said Paul Cormier, Red Hat's vice president and president of products and technologies. "The largest software transaction in history and it's an open source company. Let that sink in for a minute. We just made history," he added.           

Cloud profits

Similar to Amazon and Microsoft, IBM has made cloud computing a priority in its current growth strategy. It wants to boost its sales by delivering computing services, including storage and software, over the internet — the "cloud" — to achieve economies of scale.

IBM's Rometty admitted though that growth in the cloud was currently being held back because of the limits to existing platforms. The CEO now hopes the transaction will improve IBM's revenue growth, gross margin and free cash flow within 12 months of closing the deal.

Read more: Cloud business boosts profits of US 'Big Tech' companies

In recent years, IBM has been struggling to transition its legacy computer-making business into new technology products and services. As revenues have steadily declined, IBM shares have lost almost a third of their value in the past five years, while Red Hat shares are up 170 percent over the same period.

Now the company is hoping to catch up with Amazon, Google parent Alphabet and Microsoft in the rapidly growing cloud business. Analysts at Barclays bank wrote in a note to investors that the deal would help IBM gain a "highly strategic asset to advance its hybrid cloud initiatives."

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.

uhe/aos (Reuters, AFP, dpa)