IBM is acquiring software company Red Hat for $34 billion

"It changes everything about the cloud market", IBM CEO Ginni Rometty said in a statement.

IBM (NYSE:IBM) and Red Hat (NYSE:RHT) jointly announced today that IBM would be acquiring Red Hat in a deal valuing the company at $190 per share, representing a staggering nearly 63% premium on Red Hat's closing price Friday. Red Hat, which specialized in the Linux operating system, charges customers for support, training and consulting services.

Indeed, the move reflects IBM's difficulty in keeping pace in the era of cloud computing.

"Imagine Red Hat with the ability to invest even more and faster to accelerate open source innovation in emerging areas".

Red Hat is one of the very few companies in the cloud computing sector that has both revenue growth and free cash flow, Rometty, who has been IBM's CEO since 2012, said in an interview with Reuters. I'm sure I am not alone is fearing that IBM could ultimately ruin Red Hat and its offerings.

The acquisition of Red Hat is a game changer.

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"Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs", Rometty said. This will likely not impact IBM's stature in the public cloud where the companies have a presence, but not almost as much as the private cloud. Red Hat will continue to be led by Jim Whitehurst and Red Hat's current management team. While some of that has been from divestitures, most is from declining sales in existing hardware, software and services offerings, as the company has struggled to compete with younger technology companies. But that is a shrinking business.

In its early days, the company enjoyed the advantage of being used extensively by the USA military as the Department of Defence has certified its Red Hat Enterprise Linux product for use.

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 is committed to being an authentic multi-cloud provider, and we will prioritize the use of Red Hat technology across multiple clouds" said Arvind Krishna, Senior Vice President, IBM Hybrid Cloud. Imagine Red Hat reaching all corners of the world, with even deeper customer and partner relationships than we have today. In particular, they said they are committed to open-source efforts as Patent Promise, GPL Cooperation Commitment, the Open Invention Network and the LOT Network. One analyst, Trip Chowdhry at Global Equities Research, suggested in a note to clients that China, whose infrastructure is built on Linux, might not grant its approval.

The deal, which is subject to Red Hat shareholder approval, is expected to close in late 2019.

(Copyright © 2015. All Rights Reserved.)
 
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