IBM gears up for epic cloud fight
Computer giant boosts its ‘sky’ credentials with $33bn purchase
IBM’s $33bn purchase of Red Hat the world’s secondlargest technology deal yet is aimed at catapulting the company into the ranks of the top cloud software competitors.
The cash deal, IBM s biggest by far, boosts the 107-year-old computer-services giant’s credentials overnight in the fastgrowing and lucrative cloud market and gives it muchneeded potential for real revenue growth.
“The acquisition of Red Hat is a game-changer,” IBM chairman and CEO Ginni Rometty said in a statement. “It changes everything about the cloud market.”
IBM has seen revenue decline by almost a quarter since Rometty, 61, took the CEO role in 2012. While some of that has been from divestitures, most is from declining sales in existing hardware, software and services offerings, as the company has struggled to compete with younger technology companies. She has been trying to steer IBM towards more modern businesses such as the cloud, artificial intelligence and security software, with mixed results.
IBM shares declined about 2.4% in early US trading on Monday. The stock has dropped 19% this year, giving it a market value of $114bn. Red Hat’s stock soared 51% to $176.48 per share.
In its third-quarter earnings report, IBM disappointed investors seeking progress in those areas after six years of declining sales that had only recently started to show gains. Still, the improvements had been coming largely from IBM’s legacy mainframe business, rather than its so-called strategic imperatives. Cloud revenue grew 10% in the period to $4.5bn, but that was slower than the 20% expansion in the second quarter.
The Red Hat deal could signal to investors that IBM was not as well positioned in cloud as it had been claiming, said Jim Suva, an analyst at Citigroup Research.
“We expect investor scepticism around the deal given IBM’s messaging it is well under way in its transformation.”
Investors have grown impatient as the stock has dropped 31% over the past five years. Warren Buffett virtually gave up on IBM last year. His Berkshire Hathaway, cut its stake in the company by 94%.