Home / Business / IBM will acquire Red Hat for approximately $ 33 billion

IBM will acquire Red Hat for approximately $ 33 billion



International business machines
Corp.

IBM -4.13%

agreed to buy the software and services company

Red Hat
Inc.

RHT 45.38%

for about $ 33 billion in its biggest acquisition, an agreement aimed at helping IBM Executive Director Ginni Rometty to drive a central cloud computing business in her efforts to revive the technology giant.

Rivals of IBM

Amazon.com
Inc.

Y

Microsoft
Corp.

They have advanced in recent years in the business of providing computer power and software to rent. But Ms. Rometty said in an interview that the market is moving into a second chapter in which customers will want to work with multiple cloud providers. That should increase interest in so-called hybrid services in which companies run programs that use computing resources from their own IBM servers and web services and others at the same time, he said.

"This is a turning point," Rometty said.

Red Hat will help IBM with that effort because it is a leading provider of open source software and services that helps companies establish bridges between different platforms, he said.

The agreement comes almost seven years after Ms. Rometty's struggle to renew the company's 107-year history by reducing the oldest and slowest-growing business lines and focusing heavily on cutting-edge technologies such as artificial intelligence and computing. on the cloud. That effort led to almost six years of declining revenue, which IBM finally reversed in January with three consecutive quarters of growth.

But in the last quarter, IBM's revenue fell 2.1%, despite the booming corporate market for technology purchases. The price of IBM shares has dropped by 19% in the last year. For this year, analysts expect IBM to record $ 79.75 billion in adjusted earnings and earnings of $ 13.80 per share, according to S & P Global Market Intelligence. In 2011, one year before Ms. Rometty became CEO, IBM registered $ 106.92 billion in adjusted income and earnings of $ 13.44 per share.

IBM plans to pay $ 190 per share for Red Hat in what IBM said would be its biggest acquisition. IBM plans to use cash and debt to make the acquisition. At the end of the third quarter, I had $ 14.7 billion in cash.

Exchange positions

IBM again reduced quarterly revenues after a short streak of gains.

Change of income from the previous year

IBM is paying an unusually large premium on the deal, with 63% more than the closing price of Red Hat shares of $ 116.68 on Friday. IBM said the agreement, including the debt, has a value of $ 34 billion. Using the most recent number disclosed by Red Hat for the outstanding shares, the value of the shares of the transaction is just below that.

Founded 25 years ago, Red Hat has become the dominant provider of the Linux operating system for corporations. While Linux is available for free, Red Hat sells a version of Linux that contains software enhancements and the high level of technical support that businesses require. The company reported $ 2.9 billion in revenue for its most recent fiscal year, which ended in February 2018.

"IBM has a deep and deep customer experience … in a way that can dramatically accelerate our business," Red Hat CEO Jim Whitehurst said in an interview.

For IBM, Linux and other Red Hat software assets represent an opportunity to sell products to corporate software developers who are developing complex applications that can run on both cloud computing platforms such as Amazon and Microsoft, and in internal data centers .

"I think this is a very good and strategic move for IBM," said Crawford Del Prete, chief operating officer of industry research firm International Data Corp. "Red Hat has done a fantastic job in recent years, it has made relevant to developers and helping developers not only with Linux, but also with Linux tools. "

Red Hat, based in Raleigh, N.C., will operate as a distinct unit within the IBM hybrid cloud team. And IBM intends to retain all of the approximately 12,600 Red Hat employees, Rometty said. IBM currently has just under 370,000 employees.

Cloud companies

IBM was the fifth in the world in public cloud infrastructure service in 2017.

As companies move more of their computing to the cloud, they are choosing multiple cloud providers, for example, Amazon and Microsoft for cloud infrastructure, and

Salesforce.com
Inc.

Y

Working day

Inc. for applications. Ms. Rometty is betting that Red Hat will help IBM offer software and services to help companies connect those technologies with applications that run in their own data centers.

"You can see what I would call the expansion of the cloud, and they have to have a way to manage it," Rometty said.

Open source software is key because it facilitates the ability of customers to move their computing between several cloud providers and from their own data centers.

The challenge for IBM is that the rivals have moved ahead in the business. In the global cloud infrastructure market, IBM had a 1.9% share of revenues in 2017, according to a market research firm

Gartner
Inc.

The market leader Amazon took 51.8% of the market. IBM also followed Microsoft,

Alibaba Holding Group
Limited.

Y

Alphabet
From Inc.

Google.

Red Hat provides IBM with its star operating system, Red Hat Enterprise Linux. The software company has focused its resources on a new product called OpenShift, which allows corporate software developers to create programs that run on specialized software, called containers, which in turn can run in corporate data centers or on the Internet. cloud. Red Hat's Linux container and software in its product portfolio will help IBM remain relevant to corporate developers looking to take advantage of cloud computing, said Mr. Del Prete of IDC.

At Red Hat on Sunday, some employees expressed concern that the acquisition could affect Red Hat's most carefree corporate culture, where employees are encouraged to participate in the development of open source software projects, even if they are not fundamental for the Red Hat business. "There is still a very passionate core in Red Hat that really believes in the open source mission," said one employee.

Another Red Hat employee said he was also concerned that his culture would change, but said he hoped that IBM's marketing power and its wide sales reach among global corporations would be a boon to Red Hat. "If we can take advantage of those resources and continue operating as we are, that could be the best of both worlds," he said.

IBM intends to preserve the Red Hat culture, as well as its brand, Rometty said.

IBM said the agreement will begin to increase its free cash flow and gross margin within 12 months and accelerate revenue growth.

The acquisition, which has been approved by the boards of both IBM and Red Hat, is expected to close in the second half of 2019.

Write to Jay Greene at Jay.Greene@wsj.com and Robert McMillan at Robert.Mcmillan@wsj.com


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