IBM to Buy Software Maker Red Hat for About $34 Billion

Ginni Rometty IBM CEO

IBM is reportedly nearing a deal to acquire Red Hat, the software company valued at $20 billion

The 107-year-old U.S. company will pay Red Hat's shareholders a 62pc premium for their shares in a bid to accelerate its growth into the emerging $1trillion growth market for cloud-based computing systems.

IBM agreed to acquire software maker Red Hat a $33.4 billion bet on jump-starting its efforts to catch up in the cloud.

"Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs", IBM Chief Executive Ginni Rometty said in a press release announcing the deal.

Red Hat CEO Jim Whitehurst will continue to run the company, which will become part of the IBM Hybrid Cloud division as a separate unit. Open-source software such as the Linux operating system, the web browser Firefox and big-data analysis software such as Apache Hadoop has gradually become the bedrock for many applications, even in large enterprises.

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Rometty, 61, has been trying for years to steer the 107-year-old technology giant toward more modern businesses, such as the cloud, artificial intelligence and security software. As opposed to cloud-only services provided by other companies. It recently surprised investors with quarterly earnings that showed a decline in revenue after several straight quarters of modest growth. "It changes everything about the cloud market. Imagine Red Hat with greater resources to grow into the opportunity ahead of us", Whitehurst told employees in an email Sunday afternoon.

Why is IBM willing to pay that much for Red Hat? Since the day we chose to bring open source to the enterprise, our mission has remained unchanged. Red Hat's stock is down 28 percent over the past six months through Friday, according to data compiled by Bloomberg.

Founded in 1993, Red Hat launched its famous version of Linux OS a year later, becoming a pioneering proponent of the open source movement that arose to counter giants like Microsoft whose models were based on keeping their source code secret.

At the same time, Red Hat will aim to leverage IBM's hybrid cloud and enterprise IT scale in helping expand open source technology offerings to businesses globally. I'm sure I am not alone is fearing that IBM could ultimately ruin Red Hat and its offerings.

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The deal is a "real winner" for the two companies, who are longtime strategic partners, says Charles King, principal analyst at Pund-IT.

The two brands also re-affirmed that the open-source nature of Red Hat will be maintained, and codes will still be contributed to the community.

Although the deal was approved by both companies' boards, it's not expected to close until well into next year.

With the deal, IBM and Red Hat are clearly setting their sights on major enterprise companies that have struggled to keep up with younger challengers built around more nimble IT strategies.

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