The acquisition is by far IBM’s largest deal ever, and third-biggest in the history of U. S. tech.
IBM is acquiring Red Hat, a major distributor of open-source software and technology, in a deal valued at $34 billion, the companies announced on Sunday.
According to a joint statement, IBM will pay cash to buy all shares in Red Hat at $190 each.
The open source, enterprise software maker will become a unit of IBM’s Hybrid Cloud division, with Red Hat CEO Jim Whitehurst joining IBM’s senior management team and reporting to CEO Ginni Rometty. J. P. Morgan advised IBM and is leading the financing for the Red Hat deal.
The acquisition is by far IBM’s largest deal ever, and the third-biggest in the history of U. S. tech. Excluding the AOL-Time Warner merger, the only larger deals were the $67 billion merger between Dell and EMC in 2016 and JDS Uniphase’s $41 billion acquisition of optical-component supplier SDL in 2000, just as the dot-com bubble was bursting.
Red Hat started 25 years ago as a distributor of a particular flavor of Linux, an open-source operating system that is commonly used in server computers that power company data centers. Today, the company is known for distributing and supporting Red Hat Linux, as well as other technologies commonly used in data centers. The company, which went public at the peak of the dot-com boom in 1999, earned $259 million on revenue of $2.92 billion in its last fiscal year, which ended Feb. 28. Its revenue grew 21% between the 2017 and 2018 fiscal years.
Rometty told CNBC that the deal should not be interpreted as part of any plan for her to transition out of her position as CEO at IBM. “I’m still young and I’m not going anywhere,” she told CNBC. IBM will pause share repurchases in 2020 and 2021, but won’t touch its dividend. The pause is a cautionary measure as the company plans on returning to its normal leverage ratio in about 2 years
Open source has been the biggest theme in technology this year. Prior to IBM’s purchase of Red Hat, two of the biggest tech deals of the year were Microsoft’s $7.5 billion purchase of GitHub, a code-sharing service, and Salesforce’s $6.5 billion acquisition of MuleSoft, whose technology stitches together disparate software applications, data and devices. Earlier this month, big-data rivals Cloudera and Hortonworks agreed to merge in a $5.2 billion deal. Both Rometty and Whitehurst, in comments to CNBC, agreed that Microsoft’s purchase of Github was “irrelevant” to IBM and Red Hat’s decision to enter into a deal. While Red Hat has talked for years about potentially selling itself to other companies, including Google, never has anything gotten nearly as serious as the negotiations with IBM, according to people familiar with the matter. “We were not looking to do something,” Whitehurst told CNBC.
IBM reported lighter-than-expected revenue in its most recent earnings update. The company has been working to catch up to Amazon and Microsoft in the cloud infrastructure business.
Cloud is one of IBM’s four key strategic imperatives, or growth drivers — the others are social, mobile and analytics — and in the quarter, IBM announced cloud deals with Economical Insurance, ExxonMobil and Novis .
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.
–CNBC’s Alex Sherman, David Faber, Ari Levy and Jordan Novet contributed to this report.
