IBM To Acquire Red Hat For $34 Billion, Makes Bid For Lead In Hybrid Cloud Market

IBM’s Ginni Rometty

IBM is buying open-source software developer Red Hat for $34 billion in a blockbuster deal that IBM said will make it a leader in the market for hybrid cloud systems.

The two companies Sunday announced the agreement under which IBM will acquire all issued and outstanding common shares of Red Hat for $190.00 per share, a significant premium above Friday's $116.68 per share close.

"The acquisition of Red Hat is a game-changer. It changes everything about the cloud market," said Ginni Rometty, IBM chairman, president and CEO in a statement. "IBM will become the world's No. 1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses."

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The companies said that Red Hat will become part of IBM's hybrid cloud business "as a distinct unit, preserving the independence and neutrality of Red Hat's open source development heritage and commitment, current product portfolio and go-to-market strategy, and unique development culture."

Bob Venero, CEO of Holbrook, N.Y.-based solution provider Future Tech, a Red Hat partner and No.115 on the CRN Solution Provider 500, said IBM is going to have to show its channel mettle to make the Red Hat deal work for partners.

"IBM has always been a proprietary software and services company, and this is an open-source play," said Venero, who praised Red Hat for its strong channel partnership in enterprise accounts. "This is a lot different than what IBM has done in the past with its cloud and services business."

Venero said he is hopeful IBM will continue the strong channel relationships that Red Hat has built with partners rather than taking deals direct. "Red Hat has always been supportive of partners," he said. "We are hopeful IBM will have that same kind of partner alignment."

Venero's message for IBM CEO Rometty: "The simple message for Ginni Rometty is, 'Don't forget the channel partners who helped bring Red Hat to the level that it is today in enterprise accounts.'"

Red Hat CEO Jim Whitehurst will continue to lead the company and will join IBM's senior management team, reporting to Rometty. IBM will also maintain Red Hat's Raleigh, N.C., headquarters, facilities, brands and practices, the companies said.

"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," Whitehurst said in the statement.

IBM said it would continue "Red Hat's open governance, open source contributions, participation in the open source community and development model, and fostering its widespread developer ecosystems." The two companies will remain committed to "the continued freedom of open source, via such efforts as Patent Promise, GPL Cooperation Commitment, the Open Invention Network and the LOT Network" open-source licenses and initiatives, according to the companies' joint statement.

IBM and Red Hat have maintained an alliance for some 20 years under which a number of Red Hat products, including Linux and Kubernetes, are part of IBM's $19 billion hybrid cloud software and services business.

In May the two companies unveiled a collaboration agreement to target the hybrid cloud sector through technology and services integration in a move to accelerate cloud adoption. In Sunday's announcement Rometty described that agreement as "a key precursor" to the acquisition deal.

For its fiscal 2018, ended Feb. 28, Red Hat reported revenue of $2.92 billion, up 21 percent from fiscal 2017, and net income of $258.8 million for the year.

IBM shares closed on Oct. 26 at $124.79, just off the 52-week low of $123.71.

The deal comes just two weeks after IBM reported that its sales for its quarter ended Sept. 30 came in at $18.8 billion, down two percent from year ago period, but flat when adjusted for currency fluctuations.

The Technology Services & Cloud Platforms category, Big Blue's largest segment that includes cloud infrastructure as well as technical support services and integration software, was down two percent, with $8.3 billion in revenue.

The acquisition has been approved by the board of directors at both companies, but it must still be approved by Red Hat shareholders and is subject to regulatory approvals and other closing conditions. The companies expect to complete the acquisition sometime in the second half of 2019.

Steven Burke contributed to this story.