IBM To Buy US-Based Software Company Red Hat For $34 Billion

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US-based software company Red Hat announced Sunday it had reached an agreement to sell itself to International Business Machines (IBM) Corp. for about $34 billion, including debt.

This is by far IBM's biggest acquisition. IBM, which has a market capitalization of $114 billion, will pay $190 per share in cash for Red Hat, a 63 percent premium to Friday’s closing share price.

Founded in 1993, Red Hat is one of the very few companies in the cloud computing sector that has both revenue growth and free cash flow. Its heritage is doing business around the Linux open-source operating system, the most popular type of open-source software, which was developed as an alternative to proprietary software made by Microsoft Corp.

IBM has a public cloud that competes with Amazon Web Services. But developers use Red Hat's Linux on many public clouds, including those run by Microsoft and Google. That multi-cloud approach should help IBM bring in revenue as more companies choose to go to public clouds that are more popular than its own. And this acquisition will help IBM to expand its subscription-based software offerings, as it faces slowing software sales and waning demand for mainframe servers.

"The acquisition of Red Hat is a game-changer to IBM and we know it's the right thing. 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." said, Ginni Rometty, Chairman, President and Chief Executive Officer, IBM.

Although Red Hat is a fraction of the size of IBM, but it's growing much faster and generating cash in the process. IBM shares have lost almost a third of their value in the past five years, while Red Hat shares are up 170 percent over the same period.

While analysts project meager growth at IBM this year before contraction again in 2019, they see Red Hat growing at least 15 percent this fiscal year and next. IBM expects the combination to boost revenue growth by 2 percent and increase earnings per share, excluding certain items, two years after it closes.

IBM is hoping the deal will help it catch up with Amazon.com Inc, Alphabet Inc and Microsoft in the rapidly growing cloud business.

IBM and Red Hat said the deal would enable businesses to do even more work in the cloud, keeping their apps and data portable and secure, no matter which cloud or hybrid technologies they adopt.

Location: India

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