© IBM
- “The acquisition of Red Hat is a game-changer,” said Ginni Rometty
- Hybrid cloud market is worth $1 trillion and is still growing.
- IBM will prioritise Red Hat technology across multiple clouds
- What will happen to Shadowman at Big Blue?
There’s an interesting trend emerging amongst the mega-incumbent vendors – they cannot compete and survive through innovation, instead they need to buy their way into market relevance. Case in point is Sunday’s deal between IBM and Red Hat, which is reportedly the third largest technology deal in history and the biggest for a software company.
Here’s the skinny: IBM has reached a definitive agreement with open source cloud software specialists Red Hat under which IBM will acquire all of the issued and outstanding common shares of Red Hat for $190 per share in cash, representing a total enterprise value of approximately $34 billion. According to IBM the deal is “a game changer” and elevates the company to become the “world’s number one hybrid cloud provider”. For Red Hat shareholders it represents a 60 per cent mark-up on Friday’s closing stock price for the 25-year old company. Nice work all round.
Did IBM really need to fork out that astronomical amount of cash? Its board certainly thought so, and must have believed that it was a price worth paying to not only stay in the game (and for IBM and its peers it’s a very fraught game at the moment) but shift its business focus to the growth areas of the market. We are being bombarded with the message that we operate in a “multi-cloud” world now (see our videos from SDN NFV World Congress for example) and that all enterprises (and we include telcos as an enterprise category here) recognise the need to double down on cloud and data centres.
Indeed, IBM and Red Hat say the hybrid cloud market is worth $1 trillion and is still growing. IBM adds that most companies today are only 20 per cent along their cloud journey, renting compute power to cut costs, whilst the next 80 per cent is about unlocking real business value and driving growth. This requires shifting business applications to hybrid cloud, extracting more data and optimising all aspects of the business.
$34 billion buys IBM a huge amount of expertise and exposure in the open software market, but if you listen carefully you can hear voices crying “please, don’t screw this up…” The fact that IBM promises to let Red Hat operate as a distinct unit within IBM’s Hybrid Cloud team is a good first step, plus they have already collaborated on hybrid cloud solutions earlier this year. Maybe it’s now time to see this long-mooted rebrand of Red Hat’s corporate logo? Will Shadowman join Big Blue?
Key Quotes:
- “The acquisition of Red Hat is a game-changer – it changes everything about the cloud market,” said Ginni Rometty, IBM Chairman, President and Chief Executive Officer. “IBM will become the world’s number one hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”
- “Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise,” said Jim Whitehurst, President and CEO, Red Hat. “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.”
Original Press Release:
IBM TO ACQUIRE RED HAT, COMPLETELY CHANGING THE CLOUD LANDSCAPE AND BECOMING WORLD’S #1 HYBRID CLOUD PROVIDER
Armonk, NY and Raleigh, NC — October 28, 2018 —
- Most significant tech acquisition of 2018 will unlock true value of cloud for business
- IBM and Red Hat to provide open approach to cloud, featuring unprecedented security and portability across multiple clouds
- Deal accelerates IBM’s high-value business model, making IBM the #1 hybrid cloud provider in an emerging $1 trillion growth market
- Acquisition will be free cash flow and gross margin accretive within 12 months, accelerate revenue growth and support a solid and growing dividend
- IBM to maintain Red Hat’s open source innovation legacy, scaling its vast technology portfolio and empowering its widespread developer community
- Red Hat to operate as a distinct unit within IBM’s Hybrid Cloud team
- 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
IBM (NYSE:IBM) and Red Hat (NYSE:RHT), the world’s leading provider of open source cloud software, announced today that the companies have reached a definitive agreement under which IBM will acquire all of the issued and outstanding common shares of Red Hat for $190.00 per share in cash, representing a total enterprise value of approximately $34 billion.
“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” said Ginni Rometty, IBM Chairman, President and Chief Executive Officer. “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.”
“Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise,” said Jim Whitehurst, President and CEO, Red Hat. “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.”
This acquisition brings together the best-in-class hybrid cloud providers and will enable companies to securely move all business applications to the cloud. Companies today are already using multiple clouds. However, research shows that 80 percent of business workloads have yet to move to the cloud, held back by the proprietary nature of today’s cloud market. This prevents portability of data and applications across multiple clouds, data security in a multi-cloud environment and consistent cloud management.
IBM and Red Hat will be strongly positioned to address this issue and accelerate hybrid multi-cloud adoption. Together, they will help clients create cloud-native business applications faster, drive greater portability and security of data and applications across multiple public and private clouds, all with consistent cloud management. In doing so, they will draw on their shared leadership in key technologies, such as Linux, containers, Kubernetes, multi-cloud management, and cloud management and automation.
IBM’s and Red Hat’s partnership has spanned 20 years, with IBM serving as an early supporter of Linux, collaborating with Red Hat to help develop and grow enterprise-grade Linux and more recently to bring enterprise Kubernetes and hybrid cloud solutions to customers. These innovations have become core technologies within IBM’s $19 billion hybrid cloud business. Between them, IBM and Red Hat have contributed more to the open source community than any other organization.
“Today’s announcement is the evolution of our long-standing partnership,” said Rometty. “This includes our joint Hybrid Cloud collaboration announcement in May, a key precursor in our journey to this day.”
With this acquisition, IBM will remain committed to Red Hat’s open governance, open source contributions, participation in the open source community and development model, and fostering its widespread developer ecosystem. In addition, IBM and Red Hat 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.
IBM and Red Hat also will continue to build and enhance Red Hat partnerships, including those with major cloud providers, such as Amazon Web Services, Microsoft Azure, Google Cloud, Alibaba and more, in addition to the IBM Cloud. At the same time, Red Hat will benefit from IBM’s hybrid cloud and enterprise IT scale in helping expand their open source technology portfolio to businesses globally.
“IBM is committed to being an authentic multi-cloud provider, and we will prioritize the use of Red Hat technology across multiple clouds” said Arvind Krishna, Senior Vice President, IBM Hybrid Cloud. “In doing so, IBM will support open source technology wherever it runs, allowing it to scale significantly within commercial settings around the world.”
Upon closing of the acquisition, Red Hat will join IBM’s Hybrid Cloud team 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. Red Hat will continue to be led by Jim Whitehurst and Red Hat’s current management team. Jim Whitehurst also will join IBM’s senior management team and report to Ginni Rometty. IBM intends to maintain Red Hat’s headquarters, facilities, brands and practices.
“IBM’s commitment to keeping the things that have made Red Hat successful - always thinking about the customer and the open source community first – make this a tremendous opportunity for not only Red Hat but also open source more broadly,” said Paul Cormier, President, Products and Technologies, Red Hat. “Since the day we decided to bring open source to the enterprise, our mission has remained unchanged. And now, one of the biggest enterprise technology companies on the planet has agreed to partner with us to scale and accelerate our efforts, bringing open source innovation to an even greater swath of the enterprise.”
Financial Details
The acquisition of Red Hat reinforces IBM’s high-value model. It will accelerate IBM’s revenue growth, gross margin and free cash flow within 12 months of closing. It also will support a solid and growing dividend.
The company will continue with a disciplined financial policy and is committed to maintaining strong investment grade credit ratings. The company will target a leverage profile consistent with a mid to high single A credit rating. The company intends to suspend its share repurchase program in 2020 and 2021.
At signing, the company has ample cash, credit and bridge lines to secure the transaction financing. The company intends to close the transaction through a combination of cash and debt.
The acquisition has been approved by the boards of directors of both IBM and Red Hat. It is subject to Red Hat shareholder approval. It also is subject to regulatory approvals and other customary closing conditions. It is expected to close in the latter half of 2019.
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