IBM to acquire software company Red Hat for $34 billion

Business

(Reuters) – IBM Corp (IBM.N) said on Sunday it had agreed to acquire U.S. software company Red Hat Inc (RHT.N) for $34 billion, including debt, as it seeks to diversify its technology hardware and consulting business into higher-margin products and services.

FILE PHOTO: A logo of IBM is seen at the Mobile World Congress in Barcelona, Spain February 28, 2018. REUTERS/Yves Herman/File Photo

The transaction is by far IBM’s biggest acquisition. It underscores IBM chief executive Ginni Rometty’s efforts to expand the company’s subscription-based software offerings, as it faces slowing software sales and waning demand for mainframe servers.

IBM, which has a market capitalization of $114 billion, will pay $190 per share in cash for Red Hat, a 62 percent premium to Friday’s closing share price.

“The acquisition of Red Hat is a game-changer … IBM will become the world’s No. 1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses,” Rometty said in a statement.

Red Hat specializes in Linux operating systems, the most popular type of open-source software, which was developed as an alternative to proprietary software made by Microsoft Corp (MSFT.O).

Red Hat charges fees to its corporate customers for custom features, maintenance and technical support, offering IBM a lucrative source of subscription revenue. IBM is hoping the deal will help it catch up with Amazon.com Inc (AMZN.O), Alphabet Inc (GOOGL.O) and Microsoft in the rapidly growing cloud business.

IBM has faced years of revenue declines as it transitions its legacy computer maker business into new technology products and services. Its recent initiatives have included artificial intelligence and business lines around Watson, named after the supercomputer it developed.

To be sure, IBM is no stranger to acquisitions. It acquired cloud infrastructure provider Softlayer in 2013 for $2 billion, and the Weather Channel’s data assets for more than $2 billion in 2015. It also acquired Canadian business software maker Cognos in 2008 for $5 billion.

The deal between IBM and Red Hat is expected to close in the second half of 2019. IBM said it planned to suspend its share repurchase program in 2020 and 2021 to help pay for the deal.

IBM said Red Hat will continue to be led by Red Hat CEO Jim Whitehurst and Red Hat’s current management team. It intends to maintain Red Hat’s headquarters, facilities, brands and practices.

JPMorgan Chase & Co (JPM.N) advised IBM and is providing financing for the deal.

Reporting by Liana B. Baker and Greg Roumeliotis in New York; Editing by Cynthia Osterman and Rosalba O’Brien

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