IBM to buy Red Hat in mammoth $34bn deal

(Sharecast News) - IBM has reached agreement to acquire open-source cloud software giant Red Hat for $190 per share, it was revealed over the weekend, making for a deal worth $34bn.The two companies said IBM's acquisition of Red Hat would reinforce IBM's high-value model, and would accelerate its revenue growth, gross margin and free cash flow within 12 months of closing, as well as support a "solid and growing" dividend.IBM, stressing that said it would continue with a disciplined financial policy and was committed to maintaining strong investment grade credit ratings, will suspend its share repurchase program in 2020 and 2021.At signing, IBM said it had "ample cash, credit and bridge lines" to secure the transaction financing, with intentions to close the transaction through a combination of cash and debt. Last year Red Hat generated $2.8bn of revenue and $757m of EBITDA.The acquisition had been approved by the boards of directors of both IBM and Red Hat, but remained is subject to Red Hat shareholder approval and regulatory approvals, with an expected closing date in the latter half of 2019."The acquisition of Red Hat is a game-changer. It changes everything about the cloud market," said IBM's chairman, president and chief executive officer Ginni Rometty."IBM will become the world's number one 1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses."Rometty said most companies today were only 20% along their "cloud journey", renting compute power to cut costs."The next 80% is about unlocking real business value and driving growth. This is the next chapter of the cloud - it requires shifting business applications to hybrid cloud, extracting more data and optimising every part of the business, from supply chains to sales."Jim Whitehurst, president and chief executive officer of Red Hat, described open source as the "default choice" for modern IT solutions, adding he was "incredibly proud" of the role his company had played in making that a reality."Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience - all while preserving our unique culture and unwavering commitment to open source innovation."Analysts at RBC Capital Markets were quick to raise their target price on Red Hat stock on Monday, to match IBM's bid, saying that given the significant 63% premium and the approval of both boards, another buyer was unlikely.They also said that the "healthy multiples" indicated that Red Hat was not in a position where it needed to sell, but was presented with a "very strong" offer."This is a transformative deal, being the largest in software history, a top ten technology transaction of all time, and a significant boost to IBM's hybrid-cloud business."Given its premium and that both boards have approved the transaction, we do not anticipate the emergence of another bidder."Goldman Sachs said acquisition would be "consistent with IBM's stated goal of expanding its reach across various elements of hybrid cloud infrastructure".Analysts noted that Red Hat's turnover represented about 12% of IBM's reported total software sales, which in the past quarter declined by about 4%, equating to an annualized decline of around $0.95bn.