Many of India’s biggest and most mission-critical systems run on Red Hat, the company that has just been acquired by IBM in a whopping $34-billion Red Hat is the IT backbone of the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Aadhaar, GST and the Indian Railways. The Central Board of Direct Taxes (CBDT) and the Employees’ Provident Fund Organisation (EPFO) use it extensively, as do many other government agencies and enterprise customers.
According to a joint statement, IBM will pay cash to buy all shares in Red Hat at $190 each. Shares in Red Hat closed at $116.68 on Friday before the deal was announced.
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.
Goldman Sachs, J.P. Morgan, and Lazard advised IBM on the Red Hat deal. Morgan Stanley and Guggenheim advised Red Hat.
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, Red Hat is known for distributing and supporting Red Hat Enterprise 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.
Open source has been the most significant theme in technology this year. Before 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.
IBM reported lighter-than-expected revenue in its most recent earnings update, and its revenues shrank from the previous year after three-quarters of growth. Before that brief growth period, the company’s revenues had been slowly declining for about five years.
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.
The company has been working to catch up to Amazon and Microsoft in the cloud infrastructure business.
There’s no guarantee such a big bet will pay off. Spending this much won’t suddenly vault IBM past Amazon in the public cloud market or turn it into a trendy software growth story like Salesforce or Twilio.
Here are some of the possible benefits of IBM’s acquisition:
Red Hat is a fraction of the size of IBM, but it’s growing much faster and generating cash in the process. 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.
Working across clouds
Red Hat’s heritage is doing business around the Linux open-source operating system. 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.
Edge over other legacy vendors
The deal could help IBM, which sells traditional data center hardware, improve its positioning among companies that still run applications in their facilities.
There’s a lot at stake for IBM in the latest mega-deal. Plenty of significant tech acquisitions have failed, notably Hewlett-Packard’s $25 billion acquisition of Compaq, Microsoft’s $7.2 billion purchase of Nokia’s Devices and Services business and Google’s $12.5 billion deal for Motorola Mobility.
As Cantor Fitzgerald analysts wrote in a report on Monday, “the success of the deal will depend on its execution on the cross-selling/integration side.”