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The third largest tech acquisition closed today with the finalization of IBM's purchase of Red Hat for $34 billion.
The Purchase of Red Hat
In October of 2018 IBM(NYSE:IBM) and Red Hat jointly announced the acquisition, the acquisition itself was IBM paying $190 per share valuing Red Hate at approximately $34 billion, at the time this was over a 60% premium on the price of the stock. Only the acquisitions of EMC and Broadcom have been larger to date. The deal had been moving through regulatory channels, and after getting approved by the European Commission, it was a matter of time before the deal went through. In the previous posts, we noted there would not be much friction because IBM is not a leader in cloud computing so the market dynamics were not poised to change immediately in the eyes of regulators.
IBM claims they are committed to keeping the Red Hat community’s integrity and development model, which is one of their biggest strengths, in a press release on purchase IBM wrote:
Together, IBM and Red Hat will deliver the next-generation hybrid multicloud platform.
By combining the power and flexibility of Red Hat’s open hybrid cloud technologies with the scale and depth of IBM’s innovation and industry expertise, you now have access to the tools and talent you need to accelerate your cloud journey.
IBM is committed to preserving Red Hat’s independence, neutrality, culture and industry partnerships to give customers and partners freedom, choice and flexibility, and Red Hat’s unwavering commitment to open source will remain unchanged.
In a joint interview on the implications for developers Arvind Krishna, Senior Vice President, IBM Cloud and Cognitive Software and Paul Cormier, Red Hat Executive Vice President and President, Products and Technologies said the two companies can now simplify the infrastructure and process for in the open source community:
Arvind: The world of IT is currently going through a big shift. In an environment where there’s 1000 disparate islands, a developer’s reach is somewhat more limited than it could potentially be. As we go about and create this common infrastructure that will help companies on their journey to use different public clouds, we’ll help developers unlock all of that reach. In other words, they’ll greatly benefit from the network effect that all of this entails.
Paul: What we learned from deploying public clouds is this: Clouds can become part of the IT infrastructure, but rarely part of the entire IT infrastructure. Customers have on-premise applications that run on bare metal, virtual machines, or private clouds. And they have multiple public clouds that they now want to be able to span across. Each platform will have a different version of Linux running on it, based on specific developer needs, which means that each development environment is different as well. This is the problem that we’re aiming to solve—providing a single, common operating environment across the hybrid and multicloud world. As we help lay down that one common operating environment, we’ll not only help operators but also help developers have one operations policy, one deployment policy and one security policy. They’ll have one environment where they can build once and deploy in any one of the footprints that’s appropriate.
Financial Implications:
IBM’s stock had already been affected when the Red Hat deal was announced and as it passed regulatory approval so there was no real shock in the market when the deal closed. IBM is by definition a “blue chip” stock characterized by stability and low risk. IBM is currently trading around $140 up from earlier this year but far from their peak of around $200 in 2013. They are currently a distant fourth behind Amazon(NASDAQ:AMZN), Google(NASDAQ:GOOGL) and Microsoft(NASDAQ:MSFT) in cloud services, which is a category that's growing quickly.
This acquisition is echoing sentiments from Microsoft buying GitHub while the profit models are different in structure both acquisitions were to target developers directly. The GitHub purchase was met with ire from developers, but it seems from the very start that IBM is trying to mitigate some of this backlash by committing to keeping Red Hat open.
