IBM Corp said on Sunday it had agreed to acquire US software Firm Red Hat for $34 billion (roughly Rs. 2.5 lakh crores), including debt, since it seeks to diversify its technology hardware and consulting business into higher-margin Services and Products.
The transaction is undoubtedly IBM’s biggest acquisition. It underscores IBM Chief Executive Ginni Rometty’s attempts to expand the organization’s subscription-based software offerings, as it confronts slowing software sales and waning demand for mainframe servers.
Launched in 1993, Red Hat specialises in Linux operating systems, the most popular type of open-source applications, which was developed as an alternative to proprietary software made by Microsoft Corp..
Headquartered in Raleigh, North Carolina, Red Hat charges fees to its corporate customers for custom attributes, technical and maintenance assistance, offering IBM a lucrative source of subscription revenue.
Red Hat is among the hardly any businesses in the cloud computing sector that has both revenue growth and free cash flow, Rometty, who has been IBM’s CEO because 2012, stated in an interview with Reuters.
“This acquisition we are clearly doing for expansion synergies. This is not about cost synergies in any way,” Rometty mentioned in the meeting.
The acquisition illustrates how older tech companies are turning to dealmaking to acquire scale and fend off competitors, particularly in cloud computing, where clients using enterprise applications are trying to save money by consolidating their vendor relationships.
IBM is hoping the deal will allow it to catch up with Amazon.com, Alphabet and Microsoft from the rapidly growing cloud enterprise. IBM shares have lost almost a third of their value within the previous five decades, while Red Hat stocks are up 170 percent over precisely the same period.
“This deal reflects the culmination of IBM’s existing partnership with Red Hat, also in our view, allows IBM to obtain an extremely strategic asset to advance its own hybrid initiatives,” Barclays analysts wrote in a research note.
They added for the deal to work, it had been significant for IBM to maintain Red Hat’s neutrality when it came to working platforms and maintain Red Hat’s open-source and multi-cloud position in the market.
IBM was founded in 1911 and is famous in the tech industry as Big Blue, a reference to its formerly ubiquitous blue machines. It’s faced years of revenue declines, as it changes its legacy computer manufacturer business into new technologies services and products. Its recent initiatives have included artificial intelligence and company lines around Watson, named after the supercomputer it developed.
It acquired cloud infrastructure supplier Softlayer at 2013 for $2 billion, and the Weather Channel’s data assets for more than $2 billion in 2015. It also acquired Canadian business software maker Cognos in 2008 for $5 billion.
Other major technology companies also have recently sought to reinvent themselves through acquisitions. Microsoft this year gained open source applications platform GitHub for $7.5 billion; processor manufacturer Broadcom agreed to acquire software maker CA for nearly $19 billion; and Adobe Inc agreed to acquire marketing program manufacturer Marketo for $5 billion.
One of IBM’s main competitors, Dell Technologies, created a big bet on cloud and software computing two years back, when it obtained data storage firm EMC for about $67 billion. As a part of that deal, Dell inherited an 82 percent stake in virtualisation software firm VMware.
The deal between IBM and Red Hat is expected to close in the second half of 2019. IBM said it planned to suspend its share repurchase program in 2020 and 2021 to help cover the offer.
It plans to maintain Red Hat’s headquarters, facilities, brands and clinics.
Lazard Ltd offered financial advice to IBM, alongside Goldman Sachs Group Inc and JPMorgan Chase & Co, which also provided financing for the deal.
Guggenheim Partners LLC and Morgan Stanley were financial advisors to Red Hat, while Skadden, Arps, Slate, Meagher & Flom LLP provided legal advice to the firm on the deal. “Knowing first-hand how important open, hybrid cloud technologies are to assisting businesses unlock worth, we see the ability of bringing these two companies together, and are honored to advise IBM and commit financing for this transaction,” JPMorgan CEO Jamie Dimon said in an announcement.