IBM to Acquire Linux Distributor Red Hat for $33.4 Billion

Alicia Cross
October 29, 2018

IBM announced today that it will acquire open source firm Red Hat for approximately $34 billion in cash and debt. "It changes everything about the cloud market", said Ginni Rometty, IBM's chairman, president and CEO.

"Most companies today are only 20% along their cloud journey, renting compute power to cut costs", she said. The real question is whether Red Hat's influence on Linux and open source will grow now that it has IBM's financial backing. He said the acquisition would give Red Hat greater scale and resources to increase the impact of open source software.

It's a bold stroke because Linux has become the most common OS in public clouds.

Both companies stressed the importance of cloud computing to the deal.

IBM hopes with the acquisition it will be one of, if not the leading "Hybrid Cloud" providers in the market. Red Hat will still be helmed by Jim Whitehurst and Red Hat's current management team. "IBM is committed to being an authentic multi-cloud provider, and we will prioritize the use of Red Hat technology across multiple clouds", Arvind Krishna, senior vice president of IBM Hybrid Cloud, said in a statement. Red Hat meanwhile reported its earnings back in September which were also disappointing and its share price has dropped 19% since then.

Rometty also pledged to continue to "build and enhance" Red Hat partnerships, including those with major cloud providers, such as Amazon Web Services (AWS), Microsoft Azure, Google Cloud and Alibaba, in addition to the IBM Cloud.

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In an email to Red Hat employees, Red Hat president and CEO Jim Whitehurst said the company will be a "distinct unit within IBM" and that he'll report directly to Rometty.

IBM will pay $190 per Red Hat share in cash.

IBM's decision to acquire Red Hat for US$34 billion is a bold stroke, an admission of weakness and a mighty complication.

At the same time, Red Hat will aim to leverage IBM's hybrid cloud and enterprise IT scale in helping expand open source technology offerings to businesses globally. "IBM intends to maintain Red Hat's headquarters, facilities, brands and practices". The deal, which is also subject to regulatory review, is expected to close in the second half of 2019. In particular, they said they are committed to open-source efforts as Patent Promise, GPL Cooperation Commitment, the Open Invention Network and the LOT Network.

In its early days, the company enjoyed the advantage of being used extensively by the USA military as the Department of Defence has certified its Red Hat Enterprise Linux product for use.

Red Hat shareholders still have to approve the deal, but the board of directors at each company has signed off, and it's hard to imagine strong protests from Red Hat shareholders given the premium over its most recent closing price.

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