IBM Corp said on Sunday it had agreed to acquire US software company Red Hat Inc for $34 billion, including debt, as it seeks to diversify its technology hardware and consulting business into higher-margin products and services.
The transaction is by far IBM’s biggest acquisition. It underscores IBM Chief Executive Ginni Rometty’s efforts to expand the company’s subscription-based software offerings, as it faces slowing software sales and waning demand for mainframe servers. IBM will pay $190 per share in cash for Red Hat, a 63 per cent premium to Friday’s closing share price.
Founded in 1993, Red Hat specialises in Linux operating systems, the most popular type of open-source software, developed as an alternative to the proprietary software made by Microsoft Corp.
Red Hat is one of the few companies in the cloud computing sector that has both revenue growth and free cash flow, Rometty said in an interview with Reuters.
The acquisition illustrates how older technology companies are turning to dealmaking to gain scale and fend off competition, especially in cloud computing.
The deal between IBM and Red Hat is expected to close in the second half of 2019. IBM said it planned to suspend its share-repurchase programme in 2020 and 2021 to help pay for the deal. IBM said Red Hat would continue to be led by Red Hat CEO Jim Whitehurst and Red Hat’s current management team. It intends to maintain Red Hat’s headquarters, facilities, brands and practices.