On 28 October 2018 IBM announced the purchase of Red Hat at $190 a share in cash, about $34 billion, its largest acquisition. What is known, what remains to be approved and what to review if you use its software.
On Sunday 28 October 2018, IBM and Red Hat announced an agreement under which IBM will buy all of Red Hat’s common shares at $190 a share in cash, a total enterprise value of about $34 billion. According to Fortune it is the largest acquisition in IBM’s history, and it represents a premium of around 63% over the $116.68 at which the stock closed on Friday 26 October. Red Hat, headquartered in Raleigh, North Carolina, is described in the joint release as the world’s leading provider of enterprise open source software solutions.
What is known
The boards of both companies have approved the agreement. Still needed are the approval of Red Hat’s shareholders and of regulators, as well as the usual closing conditions; closing is expected in the second half of 2019. IBM says it has cash, credit and bridge lines to finance the deal and will use a combination of cash and debt; it also says it will suspend share repurchases in 2020 and 2021 and wants to maintain a strong credit rating.
The industrial logic IBM sets out is hybrid cloud: combining a company’s own data centres with clouds from different providers. IBM argues that companies are only 20% of the way along their cloud journey, that 80% of workloads have yet to move, and puts its current hybrid cloud business at $19 billion. These are the company’s own figures. It expects the purchase to accelerate its revenue growth, gross margin and free cash flow within 12 months of closing.
What changes and what does not, for now
IBM says Red Hat will join its hybrid cloud team as a distinct unit, that it will keep its neutrality, product portfolio, go-to-market strategy and development culture, and that its headquarters, facilities and brands will be maintained. Jim Whitehurst will continue to lead Red Hat, join IBM’s senior management team and report to IBM’s chief executive, Ginni Rometty.
The two companies promise to keep supporting open source software, with shared leadership in technologies such as Linux, containers and Kubernetes, open governance and contributions to the community, and to maintain partnerships with other cloud providers, among them Amazon Web Services, Microsoft Azure, Google Cloud and Alibaba. These are announced commitments, not facts: the deal has not yet closed.
What to review
A cash purchase of this size goes through several stages: agreement between the boards, a vote by the target’s shareholders and review by regulators. Until closing, the two companies remain independent, and an announced deal can be amended or fail to complete. The expected timetable, of between eight and fourteen months from the announcement, gives customers room to prepare.
Companies that use Red Hat products, from Linux operating systems to container platforms, can review their support and subscription contracts: terms, renewal conditions, who provides support and whether there are clauses on change of control or assignment of the contract. They can also check their dependence on a particular supplier and whether their applications could be moved to another environment. Open source software has open licences, but support, certifications and training are services that are bought. For your own situation, ask your adviser.
An announced purchase is not a completed purchase: until closing, what counts are the contracts in force.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
