IBM looks to the cloud with $33B Red Hat buy
IBM’s $33 billion purchase of Red Hat — the world’s second-largest technology deal ever — 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 fast-growing and lucrative cloud market — and gives it much-needed potential for real revenue growth.
The company once synonymous with mainframe computing has been slow to adopt cloud-related technologies and has had to play catch-up to market leaders Amazon.com and Microsoft in offering computing and other software and services over the internet.
“The acquisition of Red Hat is a game-changer,” Ginni Rometty, chairman and chief executive officer of International Business Machines, said in a statement Sunday. “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 struggled to compete with younger technology companies.
She has been trying to steer IBM toward more modern businesses, such as the cloud, artificial intelligence and security software with inconsistent results.
IBM shares declined by almost 5 percent Monday.
The stock has dropped 19 percent this year, giving it a market value of $114 billion.
In its third-quarter earnings report, IBM disappointed investors who were seeking more 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 percent in the period to $4.5 billion, but that was slower than the 20 percent expansion in the second quarter.
The Red Hat deal could signal to investors that IBM wasn’t as well-positioned in cloud as it had been claiming, said Jim Suva, an analyst at Citigroup Research.
“We expect investor skepticism around the deal given IBM’s messaging that it is well underway in its transformation,” he said.
Investors have grown impatient as the stock has dropped 31 percent over the last five years. Warren Buffett virtually gave up on IBM last year. His conglomerate, Berkshire Hathaway, cut its stake in the company by 94 percent, while increasing its investment in Apple.
The Red Hat deal represents an admission by Rometty that in-house growth wasn’t going to be enough to keep IBM from falling permanently behind in a market that is growing in importance and size.
Acquiring Red Hat makes IBM “a credible player in cloud now,” Bloomberg Intelligence analyst Anurag Rana said. “This gives them an asset that looks forward and not backwards.”
IBM will pay $190 a share in cash for Raleigh, N.C.-based Red Hat, according to a statement from the companies Sunday. That’s a 63 percent premium over Red Hat’s closing price of $116.68 per share on Friday.