IBM close the deal to acquire Red Hat for $34 bn

Computing giant IBM has leapfrogged rivals Amazon and Microsoft to become the largest hybrid cloud provider with a $34bn deal to buy software company Red Hat.

The 107-year-old US company will pay Red Hat’s shareholders a 62pc premium for their shares in a bid to accelerate its growth into the emerging $1 trillion growth market for cloud-based computing systems.

The open source, enterprise software maker will become a unit of IBM’s Hybrid Cloud division, with Red Hat CEO Jim Whitehurst joining IBM’s senior management team and reporting to CEO Ginni Rometty.

Goldman Sachs, J.P. Morgan and Lazard advised IBM on the Red Hat deal. Morgan Stanley and Guggenheim advised Red Hat.

The acquisition is by far IBM’s largest deal ever, and the third-biggest in the history of U.S. tech. Excluding the AOL-Time Warner merger, the only larger deals were the $67 billion merger between Dell and EMC in 2016 and JDS Uniphase’s $41 billion acquisition of optical-component supplier SDL in 2000, just as the dot-com bubble was bursting.

Red Hat started 25 years ago as a distributor of a particular flavor of Linux, an open-source operating system that is commonly used in server computers that power company data centers. Today, Red Hat is known for distributing and supporting Red Hat Enterprise Linux, as well as other technologies commonly used in data centers. The company, which went public at the peak of the dot-com boom in 1999, earned $259 million on revenue of $2.92 billion in its last fiscal year, which ended Feb. 28. Its revenue grew 21% between the 2017 and 2018 fiscal years.

“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. “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.

The company has been working to catch up to Amazon and Microsoft in the cloud infrastructure business.

Cloud is one of IBM’s four key strategic imperatives, or growth drivers — the others are social, mobile and analytics — and in the quarter, IBM announced cloud deals with Economical Insurance, ExxonMobil and Novis.

IBM and Red Hat said the deal would enable businesses to do even more work in the cloud, keeping their apps and data portable and secure, no matter which cloud or hybrid technologies they adopt.