IBM announced its decision to buy software company Red Hat in a deal valued at $34 billion — as part of the strategy to diversify its technology hardware and consulting business into higher-margin products and services.
The transaction underscores the efforts of IBM CEO Ginni Rometty, who faced challenges in growing IBM revenue, to expand the company’s subscription-based software offerings, as it faces slowing software sales and waning demand for mainframe servers.
Red Hat has reported revenue of $823 million (+14 percent) with subscription revenue of $723 million (+13 percent), representing 88 percent of total revenue, for the second quarter of fiscal year 2019 ended August 31, 2018.
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.
Red Hat has generated subscription revenue of $527 million (+8 percent) from Infrastructure-related offerings and $196 million (+31 percent) from Application Development-related and other emerging technology offerings.
IBM, which has a market capitalization of $114 billion, will pay $190 per share in cash for Red Hat, a 63 percent premium to Friday’s closing share price, Reuters reported.
IBM CEO Ginni Rometty said IBM will become the world’s #1 hybrid cloud provider following the acquisition of Red Hat.
IBM earlier said it revenue fell 2 percent to $18.8 billion in the third quarter ended September 2018 — due to slowing software sales and poor demand for mainframe servers.
The Armonk, New York-based company said cloud revenue was $19 billion (+20 percent) over last 12 months. As-a-service annual exit run rate for cloud revenue was $11.4 billion (+21 percent) in the quarter.
The chart — prepared by research company Canalys — indicates the top vendors in the global Cloud infrastructure market in Q3 2018.
IBM and Red Hat will continue to build and enhance Red Hat partnerships with major cloud providers such as Amazon Web Services, Microsoft Azure, Google Cloud, Alibaba and more, in addition to the IBM Cloud.
Founded in 1993, 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.
The chart — prepared by Synergy Research — indicates the Cloud infrastructure market share of IBM during the third quarter of 2018.
IBM is hoping the deal will help it catch up with Amazon.com, Alphabet and Microsoft in the rapidly growing cloud business. IBM shares have lost almost a third of their value in the past five years, while Red Hat shares are up 170 percent over the same period.
IBM 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 acquired Canadian business software maker Cognos in 2008 for $5 billion.
Microsoft this year acquired open source software platform GitHub for $7.5 billion; chip maker Broadcom agreed to acquire software maker CA Technologies for nearly $19 billion; and Adobe agreed to acquire marketing software maker Marketo for $5 billion.
One of IBM’s main competitors, Dell Technologies made a big bet on software and cloud computing two years ago, when it acquired data storage company EMC for $67 billion. Dell has also 82 percent stake in virtualization software company VMwar.
IBM said Red Hat would 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.