IBM Acquires Linux Developer Red Hat For $34 Billion

IBM on Tuesday closed the deal that saw it acquire open source software products leader and Linux developer Red Hat Inc. for $34 billion.

IBM first announced its intent to acquire Red Hat in October 2018. On May 3, the U.S. Department of Justice concluded its review of IBM's Red Hat acquisition, and by posing no objections basically approved IBM’s acquisition of Red Hat.

Red Hat will operate as a distinct unit within IBM and will become part of IBM’s Cloud and Cognitive Software segment. It will maintain its independence and neutrality, insists IBM.

Current CEO Jim Whitehurst will continue to lead Red Hat. He will join IBM’s senior management team and will report to CEO Ginni Rometty.

Its acquisition of a firm synonymous with open source software (especially Linux) positions IBM as the world’s leading hybrid cloud provider while extending Red Hat’s open source innovation to IBM clients. IBM said it intends to deliver a next-generation hybrid multicloud platform along with Red Hat.

Analysts point out both IBM and Red Hat have built major enterprise cloud businesses with consistent strong revenue growth. IBM said its cloud revenue grew from 4 percent of total revenue in 2013 to 25 percent in 2018. Its cloud revenue for the 12-month period through the first quarter of this year increased to more than $19 billion.

IBM’s acquisition of Red Hat is expected to account for two points of compound annual revenue growth to IBM over a five-year period.

On the other hand, Red Hat’s revenue for fiscal 2019 stood at $3.4 billion, a 15 percent year-over-year improvement. Fiscal Q1 2020 revenue came to $934 million, up 15 percent year-over-year.

Red Hat reported its Q1 subscription revenue was 15 percent higher year-over-year. This growth includes revenue from application development-related and other emerging technology offerings, which were up 24 percent year-over-year. Services revenue jumped 17 percent.

"We think open source has become the de facto standard in technology because it enables these solutions," said Whitehurst.

"Joining forces with IBM gives Red Hat the opportunity to bring more open source innovation to an even broader range of organizations and will enable us to scale to meet the need for hybrid cloud solutions that deliver true choice and agility."

The opportunities offered by cloud computing remain enormous as IBM estimates most enterprises today are only 20 percent into their transition to the cloud.

To remain competitive, organizations are looking to open source and a distributed cloud environment to enable a new wave of digital innovation that wasn’t possible before, said market intelligence solutions provider IDC. Over the next five years, IDC expects enterprises to invest heavily in the cloud.

“A large and increasing portion of this investment will be on open hybrid and multicloud environments that enable them to move apps, data and workloads across different environments," said Frank Gens, Senior Vice President and Chief Analyst at IDC.