IBM moves into the cloud with €29bn purchase

IBM moves into the cloud with €29bn purchase

IBM’s €29bn purchase of Red Hat, the world’s second-largest technology deal ever, is aimed at catapulting the company into the ranks of the top cloud software competitors.

The cash deal, IBM’s largest, boosts the company’s credentials overnight in the fast-growing and lucrative cloud market, and gives it a much-needed potential for real revenue growth.

The 107-year-old computer-services giant, once synonymous with mainframe computing, has been slow to adopt cloud-related technologies and has had to play catch-up to market leaders Amazon and Microsoft in offering computing and other software and services over the internet. 

The $34bn price drove Red Hat shares in the small but fast-growing software maker about 50% higher, reflecting the huge premium IBM is paying to ward off any potential challenger bids.

IBM shares dipped, and analysts said that pointed to some remaining nerves among investors over the chances of the deal closing.

At 10 times 2019 projected sales, there are some fears IBM has overpaid for the deal. 

IBM has seen revenue decline by almost a quarter since Ginni Rometty, 61, took the CEO role in 2012, as she attempts to steer IBM toward more modern businesses.

Ms Rometty told CNBC she felt the deal was done at the right price. One brokerage, Stifel, raised the prospect of a competing offer.

“Google, Amazon, and Microsoft (and potentially Oracle) have the strategic motivations and financial resources to consummate such a transaction and would not be surprised if we were to see one of them make a competing bid,” Stifel said.

Red Hat has been investing heavily in tech tools such as so-called “containers,” which make it easier for businesses to split up their computing work among a mix of data centres. 

But the combined entity will also sell software that runs on its customers’ own hardware and other clouds. 

That will put it in direct competition with firms like Microsoft.

Cloud providers such as Amazon often offer a version of the Linux operating system for free or at little cost. 

But that version of Linux is available only on Amazon, and businesses running software on another cloud have to ensure it works with a different version of Linux.

Reuters and Bloomberg

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