Big Blue’s biggest acquisition sees it acquire open source cloud giant to expand subscription-based software
IBM is looking to reinvigorate its cloud growth after agreeing to purchase Red Hat Inc for a cool $34bn (£26.5bn).
Big Blue believes the acquisition will “completely change the cloud landscape” and will allow it to become the “world’s #1 hybrid cloud provider.”
The deal comes after IBM’s latest quarterly financials missed nearly all of Wall Street expectations, and although the veteran IT giant still making a profit, Big Blue is struggling to achieve growth.
IBM announced on Sunday that the companies have reached a definitive agreement under which IBM will acquire all of the issued and outstanding common shares of Red Hat for $190.00 per share (a 63 percent premium to Friday’s closing share price), for a grand total of $34bn.
It is IBM’s biggest acquisition to date, and it is expect to help chairman, president and chief executive officer Ginni Rometty’s lengthy efforts to grow IBM’s subscription-based software offerings, in the face of slowing software sales and weakening demand for mainframes.
For the last six years Rometty has been carrying out a shrinking “by design” program, as part of IBM’s refocusing on the cloud, mobile, analytics and cybersecurity, as hardware earnings continue to fall.
“The acquisition of Red Hat is a game-changer,” said Rometty. “It changes everything about the cloud market. 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.”
It is clear that Rometty is targetting the cloud to act as a growth driver, as this is an area that IBM is lagging behind rivals such as Amazon, Microsoft, and Google.
“Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs,” Rometty said. “The next 80 percent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimising every part of the business, from supply chains to sales.”
It seems that Red Hat’s business model appealed to IBM as rather than selling software outright, it charges fees to its corporate customers for custom features, maintenance and technical support.
This acquisition should therefore give IBM a boost in the subscription revenue business model.
But Red Hat is also an open source giant as well and it specialises in Linux operating systems – a point emphasised by its CEO and President Jim Whitehurst.
“Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise,” said Whitehurst.
“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,” he added.
The deal is expected to close in the latter half of 2019, and once the deal is closed, Red Hat will join IBM’s Hybrid Cloud team as a distinct unit.
This, says IBM, will preserve “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.”
Red Hat will continue to be led by Jim Whitehurst and Red Hat’s current management team, but there is no word yet on any possible redundancies.
And one analyst explained that IBM does already have open source credentials
“IBM embraced Linux and open source software earlier than many tech titans of the last era,” said Dave Bartoletti, principle analyst at Forrester.
“Red Hat has built the most successful company ever focused solely on Linux and open source middleware,” Bartoletti. “While IBM has struggled to keep up with Amazon Web Services, Microsoft and Google in the public cloud market, this deal gives IBM a new stronghold in the cloud development platforms market.”
“The combined company has a leading Kubernetes and container based cloud-native development platform, and a much broader open source middleware and developer tools portfolio than either company separately,” he added. “While any acquisition of this size will take time to play out, the combined company will be sure to reshape the open source and cloud platforms market for years to come.”
But it should be noted that IBM is not the only tech vendor making an open source move.
Microsoft recently acquired open source software platform GitHub for $7.5 billion.
And Dell has also moved into the software and cloud space with its acquisition of storage giant EMC for $67bn a couple of years ago.
That deal gave Dell a 82 percent stake in virtualisation software giant VMware.
And the tech industry has seen more recent big value deals such as Broadcom seeking to acquire software veteran CA for nearly $19bn.