IBM’S $34B RED HAT DEAL IS RISKY BID TO BOOST CLOUD BUSI­NESS

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IBM’s plan to buy Red Hat is both the big­gest ac­qui­si­tion in IBM’s cen­tury-long his­tory and a risky ef­fort to po­si­tion it­self as a ma­jor player in cloud com­put­ing.

The $34 bil­lion stock deal trans­lates to $190 per Red Hat share — a 63 per­cent premium to the clos­ing price Fri­day for the Raleigh, North Carolina, com­pany. Red Hat Inc.’s stock soared about 45 per­cent in trad­ing Mon­day.

The path for re­vi­tal­iza­tion for IBM may be found in cloud tech­nol­ogy, a driv­ing force be­hind the block­buster deal for Red Hat over the week­end.

“It’s a big bet but ul­ti­mately they’re in a sit­u­a­tion where they needed to make a sig­nif­i­cant ac­qui­si­tion to move them po­ten­tially for­ward,” Wed­bush an­a­lyst Daniel Ives said.

Cloud com­put­ing, in which ser­vices are de­liv­ered over the in­ter­net from re­mote com­put­ers, ac­counted for nearly a quar­ter of IBM’s to­tal rev­enue over the past year.

But the com­pany has been over­shad­owed by top cloud ri­vals Ama­zon, Mi­crosoft and Google in com­pet­ing to sell its in­ter­net-based com­put­ing ser­vices to busi­nesses.

“This is about re­set­ting the cloud land­scape,” IBM Chair­man and CEO Vir­ginia Rometty said Mon­day in a con­fer­ence call.

The hy­brid cloud — when com­pa­nies use a mix of on-site, pri­vate and third-party pub­lic ser­vices — is an emerg­ing $1 tril­lion op­por­tu­nity that the com­pa­nies want to be pre­pared for, Rometty said.

Ives said there’s still plenty of room for growth as fi­nan­cial ser­vices, re­tail­ers and in­dus­trial firms in­creas­ingly mi­grate their work­loads into the cloud.

IBM’s Red Hat ac­qui­si­tion fol­lows Mi­crosoft’s re­cently com­pleted $7.5 bil­lion pur­chase of com­puter cod­ing han­gout GitHub. Both deals will al­low the larger com­pa­nies to tap into a broader com­mu­nity of open-source soft­ware devel­op­ers.

Red Hat, founded in 1993, has built a soft­ware plat­form us­ing the open-source Linux op­er­at­ing sys­tem that’s be­come “one of the key paths for en­ter­prises in their moves to the cloud,” Ives said.

The deal re­quires the ap­proval of Red Hat share­hold­ers as well as U.S. reg­u­la­tors. It is tar­geted to close in the sec­ond half of 2019, but Stifel’s Brad Re­back said oth­ers may wish to make a coun­ter­bid given Red Hat’s strengths in data cen­ters.

That prospect sent shares up $52.88 to $169.56, close to an all-time high. The stock of IBM, which is head­quar­tered in Ar­monk, New York, slipped nearly 5 per­cent.

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