In order to expand its consulting business and technology hardware to higher-margins products and services, IBM Corp has agreed to acquire American software company Red Hat for $34 billion, including debt. On Sunday, the two companies released a joint statement, revealing that IBM will pay $190 in cash for each share of Red Hat. As reported in Reuters, IBM has a market capitalization of $114 billion and new transaction is by far the company’s biggest acquisition.
While IBM faces slowing software sales and gradual decrease in the demand for mainframe servers, the acquisition of Red Hat is expected to diversify the company’s subscription-based software offerings.
Following the deal, ‘Red Hat’ will be directed to IBM’s Hybrid Cloud team where its CEO Jim Whitehurst will be joining IBM’s senior management team.
IBM’s Chairman and CEO Ginni Rometty said in a statement that the acquisition of Red Hat will change everything about the cloud market. The company will offer the only open cloud solution to corporate companies, making IBM the world’s top hybrid cloud provider, he added.
Red Hat was founded in 1993 and specializes in the most well-known open-source software, Linux operating systems, developed as an alternative to Windows OS by Microsoft Corp. The company charges fees to deliver custom features, technical support, and maintenance to its corporate customers, offering IBM a profitable source of subscription revenue.
In another statement, Red Hat CEO said that joining hands with IBM will bring the company to wider audience, in addition to providing higher level of scale, capabilities, and resources to accelerate the impact of open source as the basis for digital transformation.
According to Rometty, who has been IBM’s CEO since 2012, ‘Red Hat’ is one of the very few companies operating in cloud computing services that has revenue growth as well as free cash flow. “This acquisition is clearly for growth synergies and not for cost synergies at all”, he added.
Founded in 1911, IBM is popularly known as ‘Big Blue’ in the technology industry, referring to its once wide-ranging blue computers. While the transition of its computer making business into new technology products and services had caused years of revenue declines, the latest initiatives include artificial intelligence and business lines around Watson.