Marking its biggest ever acquisition in the company’s over century old history, IBM on Sunday announced that it is acquiring US-based software services company Red Hat, for a record $34 Billion. This will also include Redhat’s debts.
The deal has been brokered as an all-cash deal with IBM paying $190 per share, a 63% premium over Red hat’s Friday closing share price. IBM’s current market capitalisation stands at close to $114 Billion.
So what prompted this mega acquisition deal ? Well, several factors. To start with, IBM’s own software sales and subscription software sales to be specific, have been declining in a rather worrisome mode. Two, IBM has yet to have a sizeable presence in the cloud business, which is now dominated by Amazon, Google and the likes — companies which are much, much younger to IBM in the technology domain.
With this acquisition thus, IBM is hoping to catch up, and catch up real fast with the likes of Amazon, Google and Microsoft. According to Reuters data, IBM shares have lost almost a third of their value in the past five years, while Red Hat shares are up 170 percent over the same period.
Founded in 1993 and headquartered in Raleigh, North Carolina, Red Hat specialises in Linux and products around the same. The company has gained massive traction and growth, largely due to its cutting-edge offerings in the open-source Linux environment. This has also resulted in Red Hat being among those very few companies in the cloud domain, which have continued to grow rapidly and are cash-rich — both at the same time.
Other mega deals in this domain, which have represented old tech horses trying to re-invent themselves include Microsoft’s $7.5 Billion acquisition of Github, Broadcom’s $19 Billion acquisition of CA Technologies and Dell’s acquisition of EMC among others.
The deal between IBM and Red Hat is expected to close in the second half of 2019. IBM said it planned to suspend its share repurchase program in 2020 and 2021 to help pay for the deal.