IBM buys cloud computing firm Red Hat for $34B

Roman Schwartz
October 29, 2018

IBM announced Sunday it will acquire North Carolina-based open-source software company Red Hat in a $34 billion stock deal that the technology and consulting giant's chief executive says will advance the company to the next step in cloud computing.

"The acquisition of Red Hat is a game-changer".

IBM has hailed the agreement as the most significant tech acquisition of 2018, while CEO Ginni Rometty said the move "changes everything about the cloud market".

IBM's and Red Hat's partnership has spanned 20 years, with IBM serving as an early supporter of Linux, collaborating with Red Hat to help develop and grow enterprise-grade Linux and more recently to bring enterprise Kubernetes and hybrid cloud solutions to customers.

Buying Red Hat to give it management tools across multiple IaaS clouds, and probably an easier route to market for its software delivered as SaaS, therefore means a chance to turn IaaS weakness towards IBM's strengths.

The deal comes just two weeks after IBM reported that its sales for its quarter ended September 30 came in at $18.8 billion, down two percent from year ago period, but flat when adjusted for currency fluctuations. Red Hat governance, brands, headquarters and facilities will also be retained.

Founded in 1993, Red Hat specialises in Linux operating systems, the most popular type of open-source software, which was developed as an alternative to software made by Microsoft.

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Red Hat CEO Jim Whitehurst will continue to lead the company and will join IBM's senior management team, reporting to Rometty. "The next 80 percent is about unlocking real business value and driving growth", she said.

The Red Hat acquisition by IBM is the third-biggest in the history of United States technology.

"This deal represents the culmination of IBM's existing partnership with Red Hat, and, in our view, allows IBM to gain a highly strategic asset to advance its hybrid cloud initiatives", Barclays analysts wrote in a research note.

As far and fast as cloud computing is embedding itself into the enterprise, there remain many cloud-resistant applications and services. This is the next chapter of the Cloud.

Rometty said IBM "paid a very fair price".

"Importantly, Red Hat is still Red Hat. But we will have to see if AWS and Google will partner as well with Red Hat now under new ownership as they did in the past". The deal, which is the tech world's third-largest acquisition ever, has been approved by both firms' board of directors.

Moreover, it's not inconceivable other companies could step in with higher bids that Red Hat shareholders might demand to be taken seriously. The two companies will remain committed to "the continued freedom of open source, via such efforts as Patent Promise, GPL Cooperation Commitment, the Open Invention Network and the LOT Network" open-source licenses and initiatives, according to the companies' joint statement.

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