IBM is buying Red Hat for $34bn

IBM is buying Red Hat for $34bn

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.

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. Red Hat meanwhile reported its earnings back in September which were also disappointing and its share price has dropped 19% since then.

In its early days, the company enjoyed the advantage of being used extensively by the U.S. military as the Department of Defence has certified its Red Hat Enterprise Linux product for use. Investing in the cloud is now a given for business, but IBM says many companies are hesitant to deploy more services and applications because "the proprietary nature of the cloud market makes it very hard", especially when multi-cloud environments are being maintained.

"IBM will become the world's top hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses", she added.

Under the terms of the deal, Red Hat will become a separate unit within IBM while its chief executive Jim Whitehurst joins IBM's management team - reporting directly to Ginni Rometty, IBM's own chief executive.

Red Hat will continue to be led by its president and CEO Jim Whitehurst and its current management team.

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In a statement, IBM CEO Gini Rometty framed the deal as one that will make IBM the leader in hybrid cloud solutions, and remain firmly committed to open source.

IBM will be suspending its share repurchases program in 2020 and 2021, the statement claimed, but it was also said that the dividend will not be touched. The company focuses on a type of open-source software called Linux, an operating system that was created by Finnish programmer Linus Torvalds. "Red Hat has always been supportive of partners", he said. "The next 80% is about unlocking real business value and driving growth".

"Today's announcement is the evolution of our long-standing partnership", Rometty added. This is the next chapter of the cloud.

In May the two companies unveiled a collaboration agreement to target the hybrid cloud sector through technology and services integration in a move to accelerate cloud adoption. As for Red Hat, being acquired provides an opportunity to scale and access to much greater resources. While some of that has been from divestitures, most is from declining sales in existing hardware, software and services offerings, as the company has struggled to compete with younger technology companies.

JPMorgan Chase & Co. and Goldman Sachs Group Inc. and Lazard Ltd. advised IBM on the deal. It is targeted to close in the latter half of 2019, but there is a good chance that others may wish to make a counterbid.

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