IBM To Buy Red Hat In $34B Deal

by Ike Obudulu Posted on October 29th, 2018

International Business Machines Corp. (IBM) said that it agreed to acquire all of the issued and outstanding common shares of Red Hat (RHT), a provider of open source cloud software, for $190.00 per share in cash, representing a total enterprise value of about $34 billion. The company intends to suspend its share repurchase program in 2020 and 2021.

“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” said Ginni Rometty, IBM Chairman, President and Chief Executive Officer.

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

Upon closing of the acquisition, Red Hat will join IBM’s Hybrid Cloud team as a distinct unit, preserving the independence and neutrality of Red Hat’s open source development heritage and commitment, current product portfolio and go-to-market strategy, and unique development culture, IBM said.

IBM stated that Red Hat will continue to be led by Jim Whitehurst and Red Hat’s current management team. Jim Whitehurst also will join IBM’s senior management team and report to Ginni Rometty. IBM intends to maintain Red Hat’s headquarters, facilities, brands and practices.

The acquisition has been approved by the boards of directors of both IBM and Red Hat. It is subject to Red Hat shareholder approval. It also is subject to regulatory approvals and other customary closing conditions. It is expected to close in the latter half of 2019.

IBM said the acquisition will accelerate IBM’s revenue growth, gross margin and free cash flow within 12 months of closing. It also will support a solid and growing dividend.

The company said it will target a leverage profile consistent with a mid to high single A credit rating. The company intends to suspend its share repurchase program in 2020 and 2021.

IBM said, “At signing, the company has ample cash, credit and bridge lines to secure the transaction financing. The company intends to close the transaction through a combination of cash and debt.”

IBM closed down 1.31 percent on Friday at $124.79. RHT closed down 3.19 percent on Friday at $116.68.

Why Red Hat’s Open-Source Cloud Is IBM Game Changer

IBM’s $33 billion purchase of Red Hat Inc. — the world’s second-largest technology deal ever — shifts the competitive landscape for cloud computing and the software movement known as open source. Revenue at Red Hat, which sells software and services based on the open-source Linux operating system, is expected to top $3 billion for the first time this year as a growing number of large customers turn to cloud computing.

1. What does Red Hat do?

It makes open-source software. This means it gives the code for its program away for free. It makes money from charging subscriptions for services such as fixing bugs, giving advice, and releasing software upgrades. Much of Red Hat’s core business is focused around its Linux-based operating system, which helps businesses run their information technology systems. Red Hat also offers infrastructure services for companies that manage private or public cloud services.

2. If its open-source, why pay to buy Red Hat?

Red Hat made $823 million in its most recent quarter, the majority of it through subscriptions. This brings IBM a collection of relatively sticky software clients, many of whom are undergoing a transition into shifting their IT — be it back office plumbing or client-facing platforms — onto the cloud.

3. Why is cloud computing such a big deal?

Internal, legacy IT systems are expensive to maintain and even more costly to upgrade. Companies both new and old are realizing that — thanks to improved internet infrastructure — much of their old IT can be run and managed by cloud vendors such as Amazon, Microsoft and Oracle. While executives debate how much to outsource (public vs private cloud), the tech companies are more than willing to charge business to move and host projects to the cloud. It’s a business worth billions of dollars.

4. What’s a hybrid cloud?

Red Hat will become part of IBM’s Hybrid Cloud unit. Hybrid cloud is a mix of private cloud — which is built for one client — and public cloud, which is generally defined as a cloud service offered over the internet, such as the software you use to do your expenses. Executives such as IBM’s CEO Gini Rometty think hybrid will be the next big thing, balancing the need to improve technology, save money, and keep data secure.

5. Why Does IBM need Red Hat to get ahead in cloud?

IBM initially missed the boat on cloud, letting Amazon and Microsoft get way ahead in the core business of public cloud storage. For the last several years, it’s tried to get back in the game through smaller acquisitions and developing its own products, but that hasn’t been enough. Red Hat is a smaller company but it’s got solid credibility and is growing — two things IBM needs.

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