The Strategist

Why does IBM buy Red Hat?

10/29/2018 - 13:58

Last Sunday, IBM announced its decision to purchase Red Hat, a major distributor of open source software. The amount of the transaction will reach $ 34 billion and implies a substantial premium to the exchange value of the acquired company.

David Dixon
David Dixon
According to a joint statement by the two companies, IBM will buy all Red Hat shares at a price of $ 190 per unit, which is 63% more than the price at which its securities were traded on Friday before the deal was announced (the closing price was $ 116.68). The acquisition of Red Hat is by far the largest transaction for the entire existence of IBM and the third largest in the history of American high-tech companies.

Red Hat will become an independent unit within the IBM Hybrid Cloud, and CEO Jim Whitehurst will join the IBM senior management team.

The company began its activities 25 years ago as a distributor of Linux, an open source operating system. To date, Red Hat is known for the distribution and support of Red Hat Enterprise Linux, as well as other technologies widely used in data centers. The company, which became public at the peak of the dot-com boom in 1999, received $ 259 million in net profit last year with revenue of $ 2.9 billion. At the time of the announcement of the deal, its market capitalization was estimated at about $ 20.5 billion.

IBM expects that the deal will help the company catch up with giants like, Alphabet and Microsoft in the field of cloud computing. IBM shares have lost almost a third of their value in the past five years, while Red Hat securities have risen 170% over the same period.

“This deal represents the culmination of the existing partnership between IBM and Red Hat and, in our opinion, will allow IBM to get a strategically important asset for promoting its products in this area,” according to Barclays analysts.

Open source software technologies are becoming increasingly popular. The IBM and Red Hat deal is far from the first in this area. Recently, Microsoft completed the takeover of GitHub, an online developer platform, and Salesforce acquired the MuleSoft integration platform. Also earlier this year, Cloudera and Hortonworks, providers of analytics and big data processing platforms, entered into a merger agreement.