IBM announced Sunday that it has agreed to purchase Red Hat, one of the first and most prominent open-source server operating system providers, for around $34 billion in a move the companies said would make them the hybrid cloud provider of choice.
At $190 a share, the deal values Red Hat at a 63 percent premium over its closing price Friday on the stock market. Why is IBM willing to pay that much for Red Hat? The oldest company in technology believes that Red Hat can help its customers, many of which are still running the bulk of their their IT infrastructure in the old-fashioned way, address the modern era of multicloud and hybrid computing driven by Linux and containers.
IBM said that it will maintain Red Hat partnerships with major public cloud providers, such as Amazon Web Services and Microsoft Azure, which suggests that it has acknowledged that its own public cloud efforts have stalled.
“IBM is committed to being an authentic multicloud provider, and we will prioritize the use of Red Hat technology across multiple clouds,” said Arvind Krishna, senior vice president for IBM Hybrid Cloud in a statement. “In doing so, IBM will support open source technology wherever it runs, allowing it to scale significantly within commercial settings around the world.”
Red Hat’s flagship product, Red Hat Enterprise Linux, was the operating system of choice for private data center operators over the last decade or so, firmly establishing Linux as a viable alternative to Microsoft Windows Server and commercial Unix operating systems among those operating their own data centers. However, companies that are deploying workloads on public cloud providers tend to prefer Ubuntu Linux for that work, and that coupled with acceleration toward the cloud in general has stalled revenue growth in that category.
However, Red Hat has seen increasing adoption of its container management software, which works with Docker and Kubernetes to help companies manage hybrid applications deployed across their own data centers and public clouds. Subscription revenue from that category increased 31 percent to $196 million during Red Hat’s second fiscal quarter, compared to an eight-percent increase in revenue from infrastructure software.
IBM, on the other hand, has struggled to remain relevant in the public cloud era. Its 2013 acquisition of Softlayer gave the company a public cloud toehold, but all the growth in public cloud computing is coming from the big three U.S. providers, including the above-mentioned companies and Google Cloud.
Red Hat CEO Jim Whitehurst will continue to run the company, which will become part of the IBM Hybrid Cloud division as a separate unit. “IBM intends to maintain Red Hat’s headquarters, facilities, brands and practices,” the company said in a statement.
CNBC reported that while Red Hat has courted acquisition interest in the past, with Google factoring into the discussion at times, IBM was the most serious suitor in recent memory. Twitter wags immediately speculated that Whitehurst could now be in line to be the next CEO of IBM, but IBM CEO Ginni Rommety told CNBC that “I’m still young and I’m not going anywhere.”
With the deal, IBM and Red Hat are clearly setting their sights on major enterprise companies that have struggled to keep up with younger challengers built around more nimble IT strategies. While AWS and Microsoft haven’t had much trouble courting those companies, IBM and Red Hat will attempt to argue that they’ll offer the most “open” approach to the hybrid cloud given Red Hat’s open-source legacy and their commitment to helping those companies navigate multiple public cloud options, which can be very complicated at older companies that lack cutting-edge IT talent.
Of course, there are skeptics:
“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” said Ginni Rometty, IBM Chairman, President and Chief Executive Officer pic.twitter.com/xLMIs72lLC
— Charles Fitzgerald (@charlesfitz) October 28, 2018
Isn’t it more like a merger?
— Steven Sinofsky (@stevesi) October 28, 2018
Red Hat shareholders still have to approve the deal, but the board of directors at each company has signed off, and it’s hard to imagine strong protests from Red Hat shareholders given the premium over its most recent closing price. The deal, which is also subject to regulatory review, is expected to close in the second half of 2019.
Representatives from both companies will hold conference calls Monday morning to discuss more of their thinking behind the deal.
[Editor’s note: This post was updated several times as more information became available.]