IBM buying North Carolina-based Red Hat in $34B deal

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

A logo of IBM is seen at the Mobile World Congress in Barcelona, Spain February 28, 2018.

Tech giant IBM announced Sunday that it will acquire open source software company Red Hat.

The transaction is by far IBM's biggest acquisition. "It changes everything about the cloud market", said Ginni Rometty, IBM's chairman, president and CEO.

The deal will see IBM acquire all of the issued and outstanding common shares of Red Hat for $190.00 per share in cash, more than $70 above the $116.68 at which Red Hat was trading on close of business Friday.

"This is an acquisition for revenue growth, this is not for cost synergies" she said.

Cloud computing, often referred to as simply "the cloud", is the delivery of on-demand computing resources - everything from applications to data centers - over the internet on a pay-for-use basis.

Red Hat is one of the pioneers to commercialize open-source software, in which code is made freely available for others to redistribute and modify.

IBM's and Red Hat's partnership has spanned 20 years, with IBM serving as an early supporter of Linux, collaborating with Red Hat to help develop and grow enterprise-grade Linux and more recently to bring enterprise Kubernetes and hybrid cloud solutions to customers.

IBM is the granddaddy in computing.

IBM predicted the move would accelerate its revenue growth, gross margin and free cash flow within 12 months of closing. It also acquired Canadian business software maker Cognos in 2008 for $5 billion. And now, one of the biggest enterprise technology companies on the planet has agreed to partner with us to scale and accelerate our efforts, bringing open source innovation to an even greater swath of the enterprise.

Adhering to the adage of not fixing what's not broken, Red Hat will continue to operate as a separate unit.

The two companies said the deal is subject to Red Hat shareholder and regulatory approval and should be completed in the latter half of 2019.

IBM will suspend its share repurchase program in 2020 and 2021 to maintain an appropriate leverage ratio on the books but it's fair to say that this is probably the most audacious move the company has undertaken in a long time.

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.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. advised IBM on the deal and provided financing. Paul, Weiss, Rifkind, Wharton & Garrison LLP provided legal advice to IBM.

Red Hat CEO Jim Whitehurst: Why do the deal with IBM?

The Center for Media Justice launched an online petition past year to stop IBM from developing cloud resources that would use facial recognition technology to identify undocumented immigrants so that they can be detained, denied visas and deported from the United States.

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