Hurt by the ongoing slump in the PC market and overdependence on the low-margin core business, IBM (IBM) is expanding its presence in the thriving cloud computing sector. In one of the biggest deals Wall Street has witnessed in recent times, the New York-based PC maker has agreed to acquire Red Hat (RHT) for about $34 billion in cash.
After integration, the enterprise software developer with a market capitalization of $21 billion will become a part of the Big Blue’s Hybrid Cloud division. Contributions from Red Hat, headquartered in Raleigh, North Carolina, will start reflecting in IBM’s free cash flow and gross margin within a year. It is expected that post-buyout, the biggest ever by IBM, the 25-year-old Red Hat will continue with its open source offerings.
With Red Hat in its fold now, IBM is better positioned to compete with Amazon (AMZN) and Microsoft (MSFT) in the emerging areas of analytics, cybersecurity and cloud computing. IBM and Red Hat expect the combination would help businesses in working on cloud platforms in an effective and flexible manner, irrespective of the services and technologies they use.
It is expected that post-buyout, the biggest ever by IBM, the 25-year-old Red Hat will continue with its open source offerings
The deal is part of IBM CEO Ginni Rometty’s initiatives to ramp up the high-growth areas of the business so as to absorb the impact of the ongoing softness in the company’s core business. Meanwhile, the management has informed that share repurchases will be halted in 2020 and 2021 as part of the program while keeping the dividends intact.
As per the terms of the transaction, Jim Whitehurst, Red Hat’s chief executive officer, will join IBM’s leadership team, reporting to Rometty. Red Hat agreed to the deal with IBM after extensive negotiations with other tech majors like Google for a potential merger.
Though the turnaround measures have started yielding results, IBM’s revenues dropped in the third quarter and missed analysts’ estimate, reversing the recovery that began a couple of quarters ago. Earnings, meanwhile, grew and exceeded the forecast.
IBM stock has been on a downward spiral since the beginning of this month and dropped about 5% in mid-October following the unimpressive third-quarter performance. The stock, which registered a new yearly low during Monday’s morning session, lost about 18% over the past twelve months and 23% since January this year. Red Hat stock gained as much as 50% in the pre-market trading Monday, after closing the previous trading session lower.