IBM Corp said on Sunday it had agreed to acquire US software company Red Hat for $34 billion (roughly Rs. 2.5 lakh crores), including debt, as it seeks to diversify its Tech hardware and consulting Firm to higher-margin products and services.
The transaction is by far IBM’s biggest purchase. It underscores IBM Chief Executive Ginni Rometty’s attempts to expand the company’s subscription-based software supplies, as it faces 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 designed as an alternative to proprietary software made by Microsoft Corp..
Headquartered in Raleigh, North Carolina, Red Hat charges fees to its corporate clients for custom features, technical and maintenance support, offering IBM a lucrative source of subscription revenue.
Red Hat is among the very few companies in the cloud computing industry that has both revenue growth and free cash flow, Rometty, that has been IBM’s CEO since 2012, said in an interview with Reuters.
“This acquisition we’re clearly doing for growth synergies. This is not about cost synergies at all,” Rometty mentioned in the meeting.
The acquisition illustrates how old tech companies are turning into dealmaking to acquire scale and fend off competition, especially within cloud calculating, where clients using enterprise software are trying to save money by consolidating their vendor relationships.
IBM is hoping the deal will help it catch up with Amazon.com, Alphabet and Microsoft in the rapidly growing cloud business. IBM shares have lost almost a third of the value in 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, andin our view, enables IBM to gain an extremely strategic asset to progress its own hybrid initiatives,” Barclays analysts wrote in a research note.
They added for the price to work, it was significant for IBM to maintain Red Hat’s neutrality as it came to operating platforms and keep Red Hat’s open minded and multi-cloud position on the market.
IBM was founded in 1911 and is popularly known in the technology industry as Big Blue, with regard to its once ubiquitous blue computers. It has faced years of revenue declines, as it changes its heritage computer maker business into new technology products and services. Its recent initiatives have included artificial intelligence and business lines around Watson, called after the supercomputer it developed.
To be sure, IBM is no stranger to acquisitions. It obtained cloud infrastructure provider Softlayer in 2013 for $2 billion, and the Weather Channel’s data assets for over $2 billion in 2015. Additionally, it acquired Canadian business software maker Cognos in 2008 for about $ 5 billion.
Other big technology companies have also recently sought to reinvent themselves through acquisitions. Microsoft this year acquired open source software platform GitHub for $7.5 billion; processor maker Broadcom agreed to acquire software maker CA for nearly $19 billion; and Adobe Inc agreed to get advertising program maker Marketo for $5 billion.
Among IBM’s major opponents, Dell Technologies, created a big bet on cloud and software computing a couple of years ago, when it obtained data storage company EMC for $67 billion. As a part of that deal, Dell inherited an 82 percent stake in virtualisation software firm VMware.
IBM said it planned to suspend its share repurchase program in 2020 and 2021 to help cover the offer.
It plans to keep Red Hat’s headquarters, brands, facilities and practices.
Lazard Ltd provided financial advice to IBM, alongside Goldman Sachs Group Inc and JPMorgan Chase & Co, which also provided financing for the offer.
Guggenheim Partners LLC and Morgan Stanley were financial advisors to Red Hat, while Skadden, Arps, Slate, Meagher & Flom LLP provided legal advice to the company on the deal. “Knowing firsthand how significant open, hybrid cloud technologies are to helping companies unlock value, we see the power of bringing these two companies together, and are honored to advise IBM and devote funding for this transaction,” JPMorgan CEO Jamie Dimon said in a statement.