Red Hat stock up 47% after $34B U.S. takeover by IBM

Red Hat stock up 47% after $34B U.S. takeover by IBM

IBM and Red Hat have announced an agreement that IBM has struck a deal to acquire the Linux and open source software distributor for $34 billion in an all-cash transaction of $190/share.

In buying Red Hat, IBM will have assembled a cloud that includes physical servers, its own operating system and applications like human resources software.

Shares of Red Hat skyrocketed 47 per cent at the opening of trading in New York Monday after IBM, in the biggest acquisition of its 100-year history, acquired the software company.

IBM's and Red Hat have worked together for 20 years, with IBM serving as an early supporter of Linux, collaborating with Red Hat to help develop and grow enterprise-grade Linux and more recently to bring enterprise Kubernetes and hybrid cloud solutions to customers.

"The rating downgrade reflects prospective changes in IBM's debt leverage", S&P said in a statement. Red Hat solves that problem for IBM, offering an already well established open source solution, but now under the banner of IBM's Hybrid Cloud. As opposed to cloud-only services provided by other companies.

In its early days, the company enjoyed the advantage of being used extensively by the United States military as the Department of Defence has certified its Red Hat Enterprise Linux product for use. In 2000, IBM pledged that it would invest $1 billion in support of Linux and has been partners with Red Hat since at least 1998.

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The statement added: "IBM and Red Hat will remain committed to the continued freedom of open source, via such efforts as Patent Promise, GPL Cooperation Commitment, the Open Invention Network and the LOT Network".

The $34-billion stock deal translates to $190 per Red Hat share - a 63 per cent premium to the closing price Friday for the Raleigh, North Carolina company. Red Hat gives IBM software heft and an OpenStack playbook that can rival VMware, which incidentally has become quite cozy with AWS. The deal is described in the companies' press release as an evolution of the long-standing partnership. 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. Earlier this year, chairman Ginni Rometty claimed the 107-year-old United States company's reinvention - from a legacy computer maker into a cloud computing and artificial intelligence technology company - was now "largely complete".

Both Red Hat and IBM said the combined company will accelerate "hybrid multi-cloud adoption".

In its second-quarter results, Red Hat missed revenue estimates and issued guidance below analysts' predictions, but its subscription revenue was still up 20 percent YoY to $722 million.

JPMorgan Chase & Co advised IBM on the deal and provided financing. It is expected to close in the latter half of 2019.

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