IBM acquires Red Hat for $34 billion
Priya Wadhwa
10X Technology

IBM acquires Red Hat for $34 billion

We take a quick look at one of the biggest tech deals this week.

IBM has closed its $34 billion acquisition of Red Hat, a software company specialising in Linux operating systems, the most popular type of open-source software providing an alternative to Microsoft.

This move will probably define CEO Ginni Rometty's tenure, as one of the major decisions that will help IBM boost its cloud business in the trillion dollar market.

IBM announced that it will keep Red Hat's operations independent, which will continue to be led by current management and CEO Jim Whitehurst. However, it will be using its scale to support the latter's growth and boost its cloud operations.

Currently, IBM's cloud revenues account for 25% of its total sales, coming up to $19 billion in the 12 months through Q1 2019—a six-fold increase since 2013. Red Hat's smaller operations still brought it $3.4 billion in revenues, marking a 15% growth from 2018.

Although Red Hat's revenue profile is fairly substantial with strong levels of profitability, we note that purchase accounting treatment of the target company's deferred revenue ($2.8B) will make IBM unable recognise a meaningful portion of Red Hat's deferred revenue as it converts to actual revenue (near-term transitory impact); this is while IBM will have to incur 100% of Red Hat's operating expense.
Amit Daryanani, Evercore analyst

In the weeks leading up to the acquisition, IBM sold much of its software portfolio to Indian outsourcing giant, HCL.

Rometty said that with Red Hat, IBM is well-positioned for the next phase of the cloud, which will include multiple vendors, clouds and systems.

IBM said Red Hat will continue “to build and expand its partnerships, including those with major cloud providers, such as Amazon Web Services, Microsoft Azure, Google Cloud and Alibaba. ”