IBM to Buy Red Hat for $33 Billion in Biggest-Ever Acquisition

(Bloomberg) -- IBM agreed to acquire software maker Red Hat Inc. for $33.4 billion in the biggest-ever acquisition for the computer-services giant.

International Business Machines Corp. will pay $190 per share in cash for Raleigh, North Carolina-based Red Hat, according to a statement from the companies Sunday, confirming an earlier Bloomberg News report. That’s a 63 percent premium over Red Hat’s closing price of $116.68 per share on Friday.

"The acquisition of Red Hat is a game-changer. It changes everything about the cloud market," said Ginni Rometty, IBM’s chairman and chief executive officer, in the statement.

Revenue at Red Hat, which sells software and services based on the open source Linux operating system, is expected to top $3 billion for the first time this year as the company’s Red Hat Enterprise Linux product attracts business from large customers. Last quarter the company reported a record 11 contracts valued at over $5 million each and 73 over $1 million, according to a note from JMP Securities analyst Greg McDowell.

At the same time, sales last quarter overall missed analysts’ expectations and the forecast for the current quarter also fell short, fueling concerns Red Hat may be losing deals to rivals and growth may be slowing. The company said at the time that it believes the slowdown has “bottomed out.” Red Hat’s stock is down 28 percent over the past six months through Friday, according to data compiled by Bloomberg.

IBM, which has a market valuation of $114 billion, has seen revenue decline by almost a quarter since Rometty took the CEO role in 2012. While some of that has been from divestitures, most is from declining sales in existing hardware, software and services offerings, as the 107-year-old company has struggled to compete with younger technology companies.

Acquiring Red Hat makes IBM “a credible player in cloud now -- both private and hybrid cloud,” Bloomberg Intelligence analyst Anurag Rana said. “This gives them an asset that looks forward and not backwards.”

JPMorgan Chase & Co. advised IBM on the deal and provided financing.

“Knowing first-hand how important open, hybrid cloud technologies are to helping businesses unlock value, we see the power of bringing these two companies together,” JPMorgan CEO Jamie Dimon said in an emailed statement.