IBM Closes Red Hat Deal for $34 Billion

By George Leopold

July 10, 2019

Going all-in on its bet that enterprises are poised to move mission-critical workloads across hybrid clouds, IBM finally announced the closing of its blockbuster deal to acquire open source software leader Red Hat for $34 billion.

The transaction announced last October shook up the cutthroat hybrid cloud market. The lengthy gestation period for completing the debt-financed acquisition had some observers wondering whether the deal might fall through. IBM answered those doubts on Tuesday (July 9), saying it has closed the transaction by acquiring all common stock in Red Hat for $190 per share in cash.

The sheer size of the acquisition, which dwarfs previous deals as high as $4 billion, makes it a high-stakes gamble, particularly since analysts noted the IBM paid a hefty premium.

In a nod to an anxious open source software community, IBM said Red Hat would operate as an independent unit from its headquarters in Raleigh, NC. Jim Whitehurst, Red Hat’s president and CEO, will retain that title while joining IBM’s senior management team, reporting to IBM CEO Ginni Rometty.

The Red Hat acquisition moves IBM to the top ranks of the nascent hybrid cloud market. IBM is among a handful of cloud vendors seeking to chip away at Amazon Web Service’s seemingly unassailable lead in the cloud market by differentiating their services as users roll out multi-cloud strategies. Until now, Rometty argued, customers have focused on either renting IT infrastructure or moving only low-risk business applications to the cloud.

The next step, she added, is shifting the other 80 percent of core business applications to hybrid clouds, then figuring out how to manage them via multi-cloud platforms.

Rometty reiterated that strategy this week. The Red Hat acquisition “is going to allow us, and we’re the only one, [to deliver] a hybrid multi-cloud platform based on open source.”

“Businesses are starting the next chapter of their digital reinventions, modernizing infrastructure and moving mission-critical workloads across private clouds and multiple clouds from multiple vendors,” she added.

The steady shift to hybrid and multi-cloud deployments along with the integration of AI tools would allow users to move applications along with what IBM refers to as “refined” data and workloads across different platforms. IBM’s big bet on Linux-based open source tools like the Kubernetes cluster orchestrator is promoted as a way of easing the movement of data and apps across different environments.

The goal is giving cloud customers “the flexibility to build and deploy any app or workload, anywhere,” Whitehurst added. In the weeks before announcing the Red Hat deal, IBM released a multi-cloud manager designed to integrate workloads from Red Hat, AWS, Microsoft Azure and others running on Kubernetes, giving developers visibility into apps across different clusters and clouds.

The Red Hat deal also gives IBM a tool chest of open source technologies acquired by the former over the last several years, including the CoreOS application container platform and the Ansible IT automation and DevOps platform.

Meanwhile, Red Hat’s flagship Enterprise Linux, or RHEL, is expected to substantially boost the combined company’s global revenues in the coming year. Red Hat released the latest beta version of RHEL 7.7 in June.

Red Hat’s fiscal 2019 revenues totaling $3.4 billion were driven by healthy subscription revenue, especially cloud-native application development.

Its cloud business now accounts for one-quarter of IBM’s annual revenue. IBM said this week the Red Hat acquisition would add about two percentage points of compound annual revenue growth over the next five years.

IBM’s acquisition of Red Hat and Microsoft’s $7.5 billion deal last year to acquire the GitHub programming collaboration platform have heightened concerns about the future direction of the vibrant open source development community. Like Microsoft, IBM bent over backwards to reassure skeptics, noting that Red Hat would remain a vendor-neutral supplier of open source software while expanding existing partnerships with cloud rivals AWS, Microsoft Azure, Google Cloud and Alibaba.

“Red Hat has garnered a reputation of being an independent Switzerland software vendor,” Toni Sacconaghi, Bernstein senior tech analyst, told CNBC. “So the challenge for IBM is: How do you preserve that independence in the marketplace so [Red Hat] can continue to partner with other vendors, other cloud vendors, yet at the same time extract synergies, because IBM paid a significant premium for that asset?”

Hybrid IT infrastructure vendors predicted IBM’s investment will help scale Red Hat’s OpenShift and other cloud offerings. “Now that this partnership is finalized, we’ll begin to see more opportunity for hybrid IT, as companies that are hesitant to move their workloads to the public cloud will have the option to add an open source layer and manage their data across multiple clouds,” said Tim Beerman, CTO of managed services provider Ensono.

Nevertheless, IBM shares were down sharply following the close of the Red Hat deal.

–Doug Black contributed to this story.

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