In a bombshell move over the weekend, IBM announced that it would acquire Red Hat in a deal worth $34B. Big Blue announced that it would offer $190 per share of Red Hat in a cash transaction that represents a substantial premium over the latter’s current valuation. Red Hat stock closed at just $116.68 on Friday and was down slightly last week after missing analyst estimates, though the company increased subscription revenue by 20 percent.
This deal is the largest ever for an open source company and the third-largest tech deal ever.
“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” said IBM chair and CEO Ginni 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.
“Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs,” she said. “The next 80 percent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales.”
IBM is clearly playing up the cloud software angle rather than Red Hat’s 25 years of promoting and developing Red Hat Enterprise Linux. The word “cloud” appears 38 times in IBM’s press release announcing the deal. The word “Linux” appears 3 times.
It’s tricky to get a sense of how this will impact IBM’s product offerings, in part because IBM is rather difficult to analyze. Next Platform breaks down some of how IBM deliberately obfuscates some of its business segment reporting by mixing software and hardware in the same categories.
IBM has made a major push into providing cloud infrastructure with its IBM Cloud Private service, but it’s not clear if the company intends to push into this space with its own hardware. While the company offers both System z and Power-derived cloud options, Next Platform reports that the bulk of the company’s offerings are apparently x86-based.
Pushing into cloud services echoes the work that companies like Microsoft and Amazon have been doing, and may be an important future revenue source. And Red Hat has its own subscription service generating hundreds of millions of dollars of revenue already. That’s an important asset to IBM in and of itself — the company has been on a downward revenue trend for years. The company’s revenues fell in its most recent quarter after three quarters of growth — but those three quarters were preceded by five years of slow decline.
Bets on Watson haven’t paid off to date despite huge investments, and the thinking is that IBM may be looking for a different angle and method of improving its own bottom line. The company has apparently decided to make a huge bet on cloud services and Red Hat’s expertise in the hopes of improving its own near-term outlook. There may also be hoped-for synergies simply in owning one of the most important developers of Linux and ensuring that future Linux-based cloud offerings are optimally tuned for IBM’s own products. It’s not clear how this will impact the development of its AI and machine learning projects; IBM has previously done work in helping companies run AI and ML workloads on their own hardware.
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