July 9, 2019 / 12:46 PM / a month ago

IBM closes $34 billion deal to buy Red Hat to boost cloud business

(Reuters) - International Business Machines Corp (IBM.N) said on Tuesday it has closed its $34 billion (£27 billion) acquisition of software company Red Hat Inc RHT.N, as it looks to ramp up its cloud computing business.

The logo for IBM is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., June 27, 2018. REUTERS/Brendan McDermid

Underscoring the drive into high-margin businesses, IBM in October agreed to buy Red Hat, the company’s biggest acquisition in its more than 100-year history.

Ginni Rometty, IBM chief executive since 2012, has steered the company towards faster-growing segments such as cloud, software and services and away from traditional hardware products, but not without a bumpy journey. The newer areas of focus have sometimes underwhelmed investors.

In an interview, Rometty said the deal was driven by what its customers wanted and helping companies “move mission-critical work” to the cloud, offering a variety of hybrid public and private clouds. “We have all the critical parts,” she said.

Customers want hybrid cloud applications because they “look at their IT and they say, ‘Look I can’t just throw it all out and rebuild it’” and instead want a mix of public and private cloud applications “with one platform across it.”

Rometty cited as examples major IBM cloud customers like Morgan Stanley (MS.N) and Delta Air Lines (DAL.N).

Delta chief executive Ed Bastian said in a statement the company has been “working with both IBM and Red Hat for years” and said the combined firm “will be an essential part of our digital transformation.”

The company, which won approval for the purchase from U.S. regulators in May and European Union regulators in late June, agreed to pay $190 a share for Red Hat, representing a 63 percent premium.

Founded in 1993, Red Hat specializes in Linux operating systems, the most popular type of open-source software and an alternative to proprietary software made by Microsoft Corp (MSFT.O). IBM has faced years of revenue declines as it transitions from its legacy computer hardware business into new technology products and services.

Red Hat CEO Jim Whitehurst and his management team will remain in place. Whitehurst will join IBM’s senior management team and report to Rometty.

IBM will maintain Red Hat’s headquarters in Raleigh, North Carolina, and its facilities, brands and practices, and said it will operate as a distinct unit within IBM. Rometty said no job or cost cuts are planned at Red Hat.

IBM closed down 0.9 percent at $139.33.

The companies said IBM and Red Hat will offer “a next-generation hybrid multicloud platform” that will be “based on open source technologies, such as Linux and Kubernetes.”

IBM’s cloud strategy has focussed on helping companies stitch together multiple cloud platforms rather than compete head-on with “hyperscale” cloud providers such as Amazon Web Services, a unit of Amazon.com Inc (AMZN.O); Microsoft; and Alphabet Inc’s Google (GOOGL.O).

IBM said Red Hat will continue “to build and expand its partnerships, including those with major cloud providers, such as Amazon Web Services, Microsoft Azure, Google Cloud and Alibaba.”

Since 2013, IBM’s cloud revenue as a percentage of total revenue has grown sixfold to 25 percent. In the 12 months through the first quarter of 2019, cloud revenue exceeded $19 billion.

Red Hat is expected to contribute approximately two points of compound annual revenue growth over a five-year period, IBM said.

Reporting by David Shepardson; editing by Steve Orlofsky and Jonathan Oatis

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