IBM’s $34 billion Red Hat deal is a risky bid to boost cloud business

IBM’s plan to buy Red Hat is both the biggest acquisition in IBM’s century-old history and a risky effort to position itself as a major player in cloud computing.

The $34 billion (around Rs 2.5 lakh crore) stock deal translates to $190 (around Rs 14,000) per Red Hat share – a 63% premium to Friday’s closing price for the company from Raleigh, North Carolina. Red Hat stock soared about 45% in Monday trading.

IBM’s path to revitalization can be found in cloud technology, driving the blockbuster deal for Red Hat this weekend.

“It’s a big bet, but at the end of the day they find themselves in a situation where they needed to make a big acquisition to potentially move them forward,” said Wedbush analyst Daniel Ives.

Cloud computing, in which services are delivered over the Internet from remote computers, has accounted for nearly a quarter of IBM’s total revenue over the past year. But the company has been overshadowed by major cloud rivals Amazon, Microsoft and Google competing to sell its Internet-based computing services to businesses.

“This is about resetting the cloud landscape,” IBM CEO Virginia Rometty said on a conference call Monday.

Hybrid cloud – when companies use a combination of on-premises, private and third-party public services – is an emerging $1 trillion (about Rs. 73 million) opportunity that companies want to be prepared for, Rometty said.

Ives said there’s still plenty of room for growth as financial services, retailers and industrial companies increasingly migrate their workloads to the cloud.

IBM’s acquisition of Red Hat follows Microsoft’s recent $7.5 billion purchase of computer coding venue GitHub. Both agreements will allow larger companies to tap into a broader community of open source software developers.

Red Hat, founded in 1993, built a software platform using the open-source Linux operating system that has become “one of the primary paths for enterprises in their migration to the cloud,” Ives said.

The deal requires approval from Red Hat shareholders as well as US regulators. It’s slated to close in the second half of 2019, but Stifel’s Brad Reback said others might want to counteroffer given Red Hat’s strengths in data centers.

That outlook sent shares up from $52.88 to $169.56, near a record high. IBM, headquartered in Armonk, New York, shares fell nearly 5%


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