International Business Machines Corp. (NYSE: IBM) has agreed to buy software maker Red Hat Inc. (NYSE: RHT) in a $33.4 billion deal – the largest ever for the computer company.
IBM will pay $190 U.S. a share in cash for Raleigh, North Carolina-based Red Hat, according to a statement from the companies issued on Sunday. That price represents a 63% premium over Red Hat’s closing price of $116.68 U.S. per share on Friday. The deal helps IBM in its efforts to catch up in the cloud.
IBM, the 107-year-old technology giant, is trying to modernize its businesses by moving into new areas such as cloud computing, artificial intelligence and security software. Its third-quarter results disappointed investors who were seeking more progress in those areas after six years of declining sales. The improvements had been coming largely from IBM’s legacy mainframe business, rather than its so-called strategic imperatives.
The Red Hat purchase will give IBM an immediate cloud revenue boost growth as well as a suite of proven software products to sell through its global sales force. Revenue at Red Hat, which sells software and services based on the open source Linux operating system, is expected to top US$3 billion for the first time this year as the company’s Red Hat Enterprise Linux product attracts business from large customers.
IBM has a market valuation of $114 billion U.S., but has seen its revenue decline by almost a quarter since 2012. While some of that decline has been from divestitures, most is from slowing sales in existing hardware, software and service offerings, as the company has struggled to compete with younger technology companies.
"Red Hat makes IBM a credible player in cloud now -- both private and hybrid cloud," Bloomberg Intelligence analyst Anurag Rana said in a note Monday. "This gives them an asset that looks forward and not backwards."
