IBM has struck the biggest deal in its history – and the technology sector’s biggest-ever software acquisition – to up its cloud services game.
IBM has agreed to acquire the North Carolina-based cloud software firm for $34 billion. The tech pioneer, founded more than 100 years ago, is looking to transition beyond its legacy hardware and consulting business. CEO Ginni Rometty is especially keen to broaden subscription-based software offerings. IBM has seen years of declines both in software sales and demand for servers, which it has been producing since the 1960s. Over the past five years its shares have lost nearly a third of their value. Conversely, Red Hat shares have risen 170% in the same period.
Red Hat was founded in 1993, and is considered a technology sector pioneer in its own right, in cloud-based open-source software. It specializes in Linux, the most popular family of operating systems for the free software, and charges corporate customers for custom features, maintenance and tech support. The use of open-source software among enterprises has increased rapidly in the past few years, and according to the Financial Times, “The deal will help both companies accelerate the move to cloud computing among big corporate clients.”
While it dwarfs all others, the acquisition also exemplifies the technology sector trend of older companies making deals to gain scale and stay competitive, especially in cloud computing. This year Microsoft acquired open-source software platform GitHub, and Adobe made a deal to acquire Marketo, a marketing software firm. Dell, a chief rival to IBM, made major inroads into software and cloud computing when it acquired data storage company EMC two years ago, Reuters reports.
“This is to reset the entire cloud landscape,” Rometty said. “We have been reshaping IBM for this moment.” And, the deal should give IBM’s revenue growth a boost. “This acquisition we are clearly doing for growth synergies. This is not about cost synergies at all,” she added. IBM’s other recent initiatives have included artificial intelligence and business lines around its supercomputer, Watson.
With the Red Hat acquisition, IBM hopes to catch up with Amazon, Alphabet and Microsoft in cloud computing. Analysts at Barclays wrote that the deal “represents the culmination of IBM’s existing partnership with Red Hat, and, in our view, allows IBM to gain a highly strategic asset to advance its hybrid cloud initiatives.” They added that for the deal to work, IBM will need to uphold Red Hat’s neutrality with regard to operating platforms and maintain its open-source, multi-cloud position.
IBM has said that it intends to maintain Red Hat’s headquarters, facilities, brands and practices. Further, Red Hat CEO Jim Whitehurst, along with the firm’s current management team, will continue to lead the firm. The deal is expected to close in the second half of 2019.