Commentary

IBM Will Don Red Hat In $34B Deal For Open-Source Software Firm

In the third largest software deal ever coded, IBM is paying $34 billion to acquire Red Hat, which provides customized open-source, cloud-based tech solutions to the businesses -- and their successors -- to whom Big Blue used to sell massive mainframe computers. 

“The acquisition of Red Hat is a game-changer,” IBM chairman and CEO Ginni Rometty says in the statement announcing the purchase of the 25-year-old, Raleigh, N.C.–based company yesterday. “It changes everything about the cloud market,” she continues, asserting that it will make IBM the world's #1 hybrid cloud provider. 

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“The Red Hat deal represents an admission by Rometty that in-house growth wasn’t going to be enough to keep IBM from falling permanently behind in a market that is growing in importance and size,” write Ed Hammond, Kiel Porter, Alex Barinka and Gerrit De Vynck for Bloomberg.

Acquiring Red Hat makes IBM “a credible player in cloud now,” Bloomberg Intelligence analyst Anurag Rana tells them. “This gives them an asset that looks forward and not backwards,” says Rana.

“Spending billions to acquire an open-source software company might seem strange. But companies pay Red Hat to support those products, to the tune of around $3 billion in revenue each year,” writes Klint Finley for Wired.

“IBM has long been a big user of, and contributor to, Linux and other open-source projects. Open source was once a fringe, idealistic movement in software, but it’s now a core part of how big companies operate, from internet giants like Google and Facebook to Walmart and ExxonMobil. Sharing code with competitors allows companies to work together to solve common problems,” Finley adds.

“IBM rivals Amazon.com Inc. and Microsoft Corp. have jumped ahead of it in recent years in the business of providing computing power and software for rent. But Ms. Rometty said in an interview that the market is moving into a second chapter in which customers will want to work with multiple cloud providers. That should boost interest in so-called hybrid services, in which companies run programs that use computing resources from their own servers and web services from IBM and others at the same time, she said,” write Jay Greene and Robert McMillan for the Wall Street Journal.

The acquisition may also signal a shift in direction for Armonk, N.Y.-based IBM, which celebrated its centennial as “a company that never stops moving toward the future” in 2011.

“Commentators are already noting that this may be a case where IBM  finally hangs up the Watson hat and returns to the enterprise software and services business that has always been its core competency (albeit one that has been weighted far more heavily on consulting services -- to the detriment of the company’s business),” writes Jonathan Shieber for TechCrunch.

“Watson, the business division focused on artificial intelligence, whose public claims were always more marketing than actually market-driven, has not performed as well as IBM had hoped and investors were losing their patience,” he observes.

“Both companies took pains to say that the Red Hat ethos and commitment to the open-source community would continue. Red Hat will become part of IBM's hybrid cloud unit, but will retain its own branding, facilities and practices,” writes NPR’s Laurel Wamsley.

“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,” says Red Hat president and CEO Jim Whitehurst in the deal announcement. He will continue to lead the unit after the deal closes, which is expected to be in late 2019, subject to the approval of Red Hat shareholders. 

“Excluding the AOL-Time Warner merger, the only larger deals were the $67 billion merger between Dell and EMC in 2016 and JDS Uniphase’s $41 billion acquisition of optical-component supplier SDL in 2000, just as the dot-com bubble was bursting,” writes CNBC’s Alex Sherman.

“Open source has been the biggest theme in technology this year. Prior to IBM’s purchase of Red Hat, two of the biggest tech deals of the year were Microsoft’s $7.5 billion purchase of GitHub, a code-sharing service, and Salesforce’s $6.5 billion acquisition of MuleSoft, whose technology stitches together disparate software applications, data and devices. Earlier this month, big-data rivals Cloudera and Hortonworks agreed to merge in a $5.2 billion deal,” Sherman adds.

CNBC “Mad Money” host Jim Cramer gave his blessing to Sunday’s deal after having apparently touted Red Hat on his show Thursday. “I have always liked Jim Whitehurst and Red Hat... What a great move by both companies: $IBM and $RHT,” he tweeted last evening.

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