IBM has agreed a $34 billion deal to buy open-source software company Red Hat. The deal will see IBM paying all-cash for the company at a price that represents a hefty 63 per cent premium on Red Hat's closing share price on Friday.
Red Hat will become a unit within IBM's Hybrid Cloud division, with Red Hat CEO Jim Whitehurst becoming one of IBM's senior management team, and reporting to IBM CEO Ginni Rometty. Red Hat governance, brands, headquarters and facilities would also be retained.
The Red Hat purchase is just the latest in a series of big-money acquisitions by IBM over the past ten or so years.
These include its $2 billion purchase of cloud infrastructure provider Softlayer in 2013, which forms the basis of IBM's own cloud computing business. It also acquired Cognos in 2008 for $5 billion and the Weather Channel's data assets for $2 billion in 2015.
IBM's acquisition of Red Hat is expected to close in the second half of 2019.
However, there are question marks hanging over the price that IBM is paying, especially as it is planning to pay in a combination of cash and debt. Rometty claims that IBM can partially pay for it by temporarily suspending the company's share buyback scheme.
At $190, IBM isn't just paying a steep premium on Red Hat's closing stock price on Friday, but three times Red Hat's stock price in December 2016, before the latest stock market bubble.
Nevertheless, in a statement released late on Friday, Rometty claimed that "the acquisition of Red Hat is a game-changer. It changes everything about the cloud market".
She continued: "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 per cent along their cloud journey, renting compute power to cut costs. The next 80 per cent 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."
Red Hat CEO Jim Whitehurst claimed that the acquisition by IBM would provide the organisation with even more resources to drive Linux into the cloud.
"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," said Whitehurst in the same statement.
The statement went on to claim that IBM had been an early and long-time supporter of Linux, collaborating with Red Hat to develop enterprise-grade Linux back in the early 2000s, "and more recently to bring enterprise Kubernetes and hybrid cloud solutions to customers".
The statement added: "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."
IBM, added Arvind Krishna, senior vice president of IBM Hybrid Cloud, would remain "committed to being a multi-cloud provider, but would prioritise the use of Red Hat technology across multiple clouds".
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