The computing giant will be shelling out $190 for each of Red Hat's shares.
IBM will suspend its share repurchase program in 2020 and 2021 to maintain an appropriate leverage ratio on the books but it's fair to say that this is probably the most audacious move the company has undertaken in a long time.
IBM and Red Hat announced the acquisition on October 28 and held an investor call on October 29 to discuss the deal. "It changes everything about the cloud market", said Ginni Rometty, IBM's chairman and chief executive officer.
Red Hat CEO Jim Whitehurst will continue to lead the company and will join IBM's senior management team, reporting to Rometty.
In an interview with CNBC, however, IBM Chair and CEO Ginni Rometty said IBM didn't pay too steep a price.
IBM will be suspending its share repurchases program in 2020 and 2021, the statement claimed, but it was also said that the dividend will not be touched. "The largest software transaction in history and it's an open source company". Morgan Stanley and Guggenheim Partners were financial advisers to Red Hat, while Skadden Arps Slate Meagher & Flom provided legal advice.
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"The next 80% percent is about unlocking real business value and driving growth". "Powered by IBM, we can dramatically scale and accelerate what we are doing today", said Whitehurst in his email to staff announcing the deal.
The hybrid cloud - when companies use a mix of on-site, private and third-party public cloud services - is an emerging $1 trillion opportunity that the companies want to be prepared for, Rometty said. This is the next chapter of the cloud. The culture will remain as well-though it's possible IBM and Red Hat may cross-pollinate a bit more than they have in the past. "It requires shifting business applications to hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales".
Red Hat has been in business since 1993 and has expanded its offerings from Linux to a number of open source middleware products.
"We're thrilled to be able to jointly drive our hybrid cloud leadership and support the expansion and growth of Red Hat's leading open-source technology portfolio", Jim Whitehurst, CEO of Red Hat, said during the call. "This includes our joint hybrid cloud collaboration announcement in May, a key precursor in our journey to this day". As opposed to cloud-only services provided by other companies.
For its fiscal 2018, ended February 28, Red Hat reported revenue of $2.92 billion, up 21 percent from fiscal 2017, and net income of $258.8 million for the year. According to IBM, the acquisition was approved by both boards of directors and is subject to Red Hat shareholder approval.
The deal comes just two weeks after IBM reported that its sales for its quarter ended September 30 came in at $18.8 billion, down two percent from year ago period, but flat when adjusted for currency fluctuations. It is expected to close in the latter half of 2019.