Big Blue to Buy Red Hat for $34 Billion

IBM Red Hat

IBM’s acquisition of Red Hat is the largest deal ever for an open source company and the third-largest in the tech industry.

The deal makes IBM the No. 1 hybrid cloud provider in an emerging $1 trillion growth market. IBM is trailing Amazon and Microsoft in cloud infrastructure business, and investment in cloud is one of IBM’s four key strategic imperatives along with social, mobile and analytics.

Red Hat is a leading provider of open source software and services for enterprise customers, focusing on cloud computing and Linux servers. In 2012, Red Hat was the first company in that vertical to surpass $1 billion in revenue.

The addition of Red Hat to IBM’s Hybrid Cloud division enables it to accelerate businesses shifting to online-only operations and expands its cloud computing offerings.

IBM chairman, president and CEO Ginni Rometty said that “most companies today are only 20 percent along their cloud journey, renting [computer] power to cut costs. The next 80 percent is about unlocking real business value and driving growth.”

Red Hat started 25 years ago as a distributor of a version of Linux, and went public at the peak of the dot-com boom in 1999, earning $259 million on revenue of $2.92 billion in its last fiscal year. Its Linux OS was developed as an alternative to proprietary software made by Microsoft Corp.

Open source is a hot commodity this year and previous deals include Microsoft’s $7.5 billion purchase of GitHub, and Salesforce’s $6.5 billion acquisition of MuleSoft.

Big Blue buying Red Hat is a deal that benefits both. “Red Hat charges fees to its corporate customers for custom features, maintenance and technical support, offering IBM a lucrative source of subscription revenue,” reports Reuters. “Red Hat is one of the very few companies in the cloud computing sector that has both revenue growth and free cash flow.”

IBM Red Hat

IBM is responding to slowing earnings recently and its slip from dominance in the days of hardware manufacturing that was replaced by a focus on enterprise and web hosting services.

The Red Hat acquisition diversifies IBM’s technology hardware and consulting business into higher-margin products and services. “This acquisition we are clearly doing for growth synergies. This is not about cost synergies at all,” Rometty said, according to Reuters.

“The acquisition illustrates how older technology companies are turning to dealmaking to gain scale and fend off competition, especially in cloud computing, where customers using enterprise software are seeking to save money by consolidating their vendor relationships,” continues Reuters.

IBM Red Hat

Big Blue, founded in 1911, acquired the nickname in reference to its once omnipresent blue computers

“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” said Rometty. “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.”

“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 Jim Whitehurst, President and CEO, Red Hat, in a press release. “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.”

“Today’s announcement is the evolution of our long-standing partnership,” said Rometty. “This includes our joint Hybrid Cloud collaboration announcement in May, a key precursor in our journey to this day.”

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