Published: Mon, October 29, 2018
Markets | By Erika Turner

IBM close to acquiring Raleigh-based Red Hat

IBM close to acquiring Raleigh-based Red Hat

IBM is buying cloud computing company Red Hat for $34 billion, its biggest acquisition ever, the company announced on Sunday.

Though not exactly the oldest, Red Hat is indeed one of the pioneers in the Linux and open source world. While things are all status quo for now, big companies do have the tendency to pull the rug from under such projects which, compared to other open source software, often need more resources to serve a large user base. "It changes everything about the cloud market", IBM Chief Executive Ginni Rometty said. Raleigh-based Red Hat will remain a "distinct unit" within IBM, CEO Jim Whitehurst told employees.

Cloud computing, often referred to as simply "the cloud", is the delivery of on-demand computing resources - everything from applications to data centers - over the internet on a pay-for-use basis.

IBM will suspend its share repurchase program in 2020 and 2021 to maintain an appropriate leverage ratio on the books but it's fair to say that this is probably the most audacious move the company has undertaken in a long time. "The next 80 percent is about unlocking real business value and driving growth", she said.

Red Hat's flagship product, Red Hat Enterprise Linux, was the operating system of choice for private data center operators over the last decade or so, firmly establishing Linux as a viable alternative to Microsoft Windows Server and commercial Unix operating systems among those operating their own data centers.

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Headquartered in Raleigh, North Carolina, Red Hat charges fees to its corporate customers for custom features, maintenance and technical support, offering IBM a lucrative source of subscription revenue. I'm sure I am not alone is fearing that IBM could ultimately ruin Red Hat and its offerings. "This is a lot different than what IBM has done in the past with its cloud and services business". "IBM intends to maintain Red Hat's headquarters, facilities, brands and practices", the company said in a statement.

For all that, maintaining Red Hat's standing and culture could prove hard for the company once known as Big Blue.

With this acquisition, IBM will remain committed to Red Hat's open governance, open source contributions, participation in the open source community and development model, and fostering its widespread developer ecosystem.

Acquiring Red Hat makes IBM "a credible player in cloud now", Bloomberg Intelligence analyst Anurag Rana said. "It remains to be seen if IBM can play the same role, which would be significant upside for IBM". Imagine Red Hat reaching all corners of the world, with even deeper customer and partner relationships than we have today.

The deal, which is subject to Red Hat shareholder approval, is expected to close in late 2019. One analyst, Trip Chowdhry at Global Equities Research, suggested in a note to clients that China, whose infrastructure is built on Linux, might not grant its approval. It's probably both a tacit admission that the company can grow faster with younger, nimbler innovators than without them so it seems like there is business sense to the deal.

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