International Business Machines Corp. said Sunday it plans to be the world’s largest hybrid cloud provider by acquiring open-source software company Red Hat Inc. for 63% above Friday’s closing price.
IBM IBM, -1.31% said Red Hat RHT, -3.19% agreed to be acquired for $190 a share in cash in a deal with an enterprise value of about $34 billion. Red Hat shares closed down 3.2% at $116.68 on Friday, were down 0.7% in Friday’s after-hours trading, and don’t appear to have registered any pre-market trades to Monday’s open as of yet, according to FactSet data. With 176 million shares of Red Hat outstanding, the company has a market cap of $20.54 billion.
IBM’s stock closed down 1.3% at $124.79 on Friday. IBM has scheduled a conference call with investors on Monday at 8:30 a.m. Eastern.
“The acquisition of Red Hat is a game-changer,” said Ginni Rometty, IBM’s chairman, president and chief executive, in a statement Sunday. “It changes everything about the cloud market.”
A hybrid cloud is an arrangement where a company keeps some of its data in a public cloud service and some of its data on servers on its own premises, often, in the cases of financial institutions, for regulatory reasons.
“Most companies today are only 20% along their cloud journey, renting compute power to cut costs,” Rometty said. “The next 80% 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.”
In a deal expected to close in the latter half of 2019. Red Hat will become a “distinct unit” of IBM Cloud, which will be led by Red Hat president and CEO Jim Whitehurst, who will report to Rometty.
IBM shares took a hit after this past earnings report as some analysts complained that segments meant to wean Big Blue from its legacy mainframe business, such as Watson AI and IBM Cloud, are not growing fast enough. IBM reported that third-quarter revenue at its technology services and cloud-platform segment, which includes IBM Cloud, was flat at $8.3 billion compared with a year ago, while analysts had expected $8.43 billion.
In Red Hat’s latest earnings report in September, the company posted revenue and an outlook that was below Wall Street expectations at the time,
Also, in the latest numbers from research firm Gartner in August, IBM Cloud ranked fifth in terms of cloud revenue behind Amazon.com Inc.’s AMZN, -7.82% Amazon Web Services, Microsoft Corp.’s MSFT, -1.24% Azure, Alibaba Group Holding Ltd. BABA, -1.20% and Alphabet Inc.’s GOOG, -2.20% GOOGL, -1.80% Google Cloud Platform.
Read: Record profit can’t save Amazon from stock downturn
IBM said Red Hat will continue to “build and enhance” Red Hat partnerships with AWS, Azure, GCP and Alibaba.
The announced deal follows another big acquisition of an open-source company by a tech giant, namely Microsoft’s planned $7.5 billion acquisition of GitHub.
IBM said it “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.”
As of Friday’s close, IBM shares are down 18.7% for the year, while Red Hat shares are down 2.9%, compared with a 0.1% gain in the Dow Jones Industrial Average DJIA, -1.19% , a 0.6% rise in the S&P 500 index SPX, -1.73% and a 3.8% advance in the Nasdaq Composite Index COMP, -2.06% .
