Red Hat CEO Jim Whitehurst will continue to run the company, which will become part of the IBM Hybrid Cloud division as a separate unit. Prior to this announcement, Microsoft bought GitHub which was interpreted as quite a big deal, while Salesforce bought Mulesoft.
The deal values the company at $190 a share, a almost 63 percent premium over where the stock traded on Friday, at $116.68. Presumably the acquisition will have to jump various regulatory hurdles before it is set in stone.
IBM chief executive Ginni Rometty says the acquisition would make IBM the world's No. 1 hybrid cloud provider - that's when companies use a mix of on-site, private and third-party public cloud services.
IBM Corp said on Sunday it had agreed to acquire US software company Red Hat Inc for $34 billion, including debt, as it seeks to diversify its technology hardware and consulting business into higher-margin products and services. The company once synonymous with mainframe computing has been slow to adopt cloud-related technologies and has had to play catch-up to market leaders Amazon.com Inc. and Microsoft Corp.in offering computing and other software and services over the internet. Red Hat governance, brands, headquarters and facilities will also be retained. Red Hat, on the other hand, could not monetise its own product suite effectively, and annual revenue remained around $3 billion.
"The acquisition of Red Hat is a game changer".
IBM will suspend its share repurchase program in 2020 and 2021 to maintain an appropriate leverage ratio on the books but it's fair to say that this is probably the most audacious move the company has undertaken in a long time.
"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", Paul Cormier, Red Hat's president for products and technologies, said in a statement. It recently surprised investors with quarterly earnings that showed a decline in revenue after several straight quarters of modest growth. "This gives them an asset that looks forward and not backwards". Red Hat was founded in the 1990s by Canadian Bob Young. "Red Hat customers that want to remain on-premises are a large upsell market".
JPMorgan Chase & Co advised IBM on the deal and provided financing.
It's not immediately obvious to me how the marriage between IBM and Red Hat brings combined value to the market.
"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", JPMorgan CEO Jamie Dimon said in an e-mailed statement.