A Tip of the Red Hat: IBM closes Red Hat acquisition for $34 billion

July 30, 2019

3 min read

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What's going on here?

International Business Machines Corp (IBM) has made the largest acquisition in its 108-year history, as it bought Red Hat (an open-source software company) for $190 per share which amounts to a $34 billion bill.

What does this mean?

The deal, that was originally announced in October 2018, has now been wrapped up after getting the green light from the US Department of Justice and the European Commission regarding any concerns over competition regulation. Red Hat will keep their headquarters in North Carolina and the company has underlined that it will maintain “a level of distinction” with IBM according to Red Hat’s CEO Jim Whitehurst. Subsequently, Whitehurst’s management team will remain unchanged and Red Hat will function as a distinct unit under IBM’s operations.

Red Hat, founded in 1993, specialises in Linux operating systems, which has become the most popular type of open-source software. The International Data Centre (IDC) recently carried out a study that found that software and applications using Red Hat Enterprise Linux could contribute to over $10 trillion of global business revenues this year. This merger will focus on creating “a next-generation hybrid multi-cloud platform” that is based on Red Hat’s strong suits such as Linux and Kubernetes (open-source operating systems that manage hardware and software resources as well as common services for computer programs).

What's the big picture effect?

Another prime example of companies embracing the tech side of business, this merger is crucial for the lagging tech firm IBM which has seen shrinking revenue for six out of the last seven years. IBM has struggled to keep up with rivals such as Microsoft, Google, Amazon and Alibaba, especially when it comes to cloud-related technology. Having been late to invest in the public cloud revolution, IBM has had to resort to acquiring smaller software firms to remain competitive, as it did in its 2013 $2 billion acquisition of SoftLayer Technologies Inc. With Amazon’s strategy of investing on huge data centres that deal with companies’ computing tasks (public-cloud tech), IBM has seen its cloud revenue grow to 25% of total equity, up from 4% in 2013. Hence, IBM’s CEO Ginni Rometty has put all her chips on the profitability of the hybrid cloud in the world’s second largest ever tech deal with Red Hat.

But there is more to this deal than meets the eye. IBM’s acquisition of Red Hat is taking the stance that if you can’t beat your competitors, you join them. Red Hat’s clients include IBM’s main competitors (Amazon Web Servers, Alibaba, Google Cloud and Microsoft Azure). Thus, IBM is choosing to partner rather than compete with these firms, a strategy also used by the former CEO of IBM Lou Gerstner who led IBM to join forces with software developers rather than compete with them back in the 1990s.

The difficulty with this tactic is how to effectively integrate Red Hat into IBM without arousing too much fear from IBM’s competitors, destroying Red Hat’s long-term client relations. For Red Hat, it is a huge opportunity to gain a foothold on the international tech stage. With IBM’s giant sales force, improving their current offers and expanding further into financial services, telecoms, healthcare and transportation industries is a promising prospect.

The landmark deal moved along steadily but whether Red Hat can maintain its utility through a large degree of independence remains to be seen.

Report written by Will Holmes

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