IBM set to acquire North Carolina-based Red Hat in $34B deal

IBM is reportedly nearing a deal to acquire Red Hat, the software company valued at $20 billion

If you ask IBM, the deal is all about the cloud.

IBM said it will make the purchase with cash, credit and bridge lines, but did note that it would be disciplined to preserve its credit rating.

IBM (NYSE:IBM) and Red Hat (NYSE:RHT) jointly announced today that IBM would be acquiring Red Hat in a deal valuing the company at $190 per share, representing a staggering nearly 63% premium on Red Hat's closing price Friday.

However, Red Hat has seen increasing adoption of its container management software, which works with Docker and Kubernetes to help companies manage hybrid applications deployed across their own data centers and public clouds.

The Raleigh, North Carolina based company is today present in 35 countries and employs some 12,000 people, and is one of the best-known open-source players whose customers pay for tailor-made solutions.

BIG BLUE IBM is to acquire, er, Red Hat in an all-cash deal valuing the open source software and services company at $34bn (£26.5bn). "It changes everything about the cloud market", said IBM CEO Ginni Rometty in a statement on Sunday evening South African time. The two companies called the acquisition a logical step after they've worked together for 20 years, saying IBM served as an early supporter of Linux, a key component of Red Hat's software distribution system. "IBM intends to maintain Red Hat's headquarters, facilities, brands and practices", the company said in a statement. It also is subject to regulatory approvals and other customary closing conditions and is expected to close in the latter half of 2019.

Red Hat itself has been missing analyst targets and also guided below expectations for their next quarter, raising concerns that the company itself was losing out to rivals. 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 Inc. and Microsoft Corp.in offering computing and other software and services over the internet. Joining forces with IBM offers all of that, years ahead of when we could have achieved it alone. These innovations have become core technologies within IBM's $US19 billion hybrid cloud business. IBM operates one of its largest corporate campuses in Research Triangle Park and employs several thousand people across the state. Red Hat's stock is down 28 per cent over the past six months through Friday, according to data compiled by Bloomberg. Morgan Stanley and Guggenheim Partners were financial advisers to Red Hat, while Skadden Arps Slate Meagher & Flom provided legal advice. "When the transaction closes ... we will be a distinct unit within IBM and I will report directly to Ginni", he wrote. IBM is acquiring Red Hat for our incredible people and our incredibly special culture and approach to making better software.

The acquisition illustrates how older technology companies are turning to dealmaking to gain scale and fend off competition, especially in cloud computing, where customers using enterprise software are seeking to save money by consolidating their vendor relationships. "The next 80% is about unlocking real business value and driving growth".

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