IBM Corp has announced that it will be acquiring the US based software company for $34 billion, including debt. According to Reuters, with this acquisition, the company eyes the diversify of its technology hardware and consulting business into products and services that have a higher-margin.
This will be IBM’s biggest acquisition so far and it is a part of CEO Ginni Rometty’s efforts to widen the company’s software offerings that are subscription based. The need for doing this arises out of the drop in software sales of the company and the diminishing demand for mainframe servers.
IBM has a market capitalisation of $114 billion and for acquiring Red Hat, the company will be paying $190 per share in cash.
Red Hat’s speciality is in Linux operating systems, which are an alternative to Microsoft’s proprietary software. According to what Rometty told Reuters, Red Hat is one among the few companies in cloud computing sector which has free cash flow as well as revenue growth. Rometty was quoted saying, “This acquisition we are clearly doing for growth synergies. This is not about cost synergies at all.”
While IBM shares have fallen by almost a third of their value in the last five years, Red Hat’s have grown by over 170% during the same time period. By acquiring Red Hat, IBM is hoping to catch up with the likes of Amazon.com, Alphabet and Microsoft.
Other recent initiatives of IBM, which has faced years of revenue declines while transitioning the computer maker business into new technology products and services, include artificial intelligence and several other businesses around Watson.
Earlier in 2008, the company had acquired a Canada based business software maker Cognos for $5 billion, followed by an acquisition of cloud infrastructure provider Softlayer for $2 billion in 2013, and Weather Channel’s data assets for ‘over $2 billion’ in 2015.
IBM and Red Hat’s deal is expected to close in 2019. In order to pay for the deal, IBM will be suspending its share repurchase program in 2020 and 2021. The company has also said that Red Hat would continue functioning its current CEO Jim Whitehurst and that its current management would remain intact. Red Hat’s headquarters, facilities, brands and practices would also remain the same.