IBM Corp (NYSE:IBM) announced Monday it has bought Red Hat Inc (NYSE:RHT) for $34 billion to create one of the world's biggest hybrid cloud providers.
IBM said it will acquire all of the issued and outstanding shares of Red Hat for $190 per share in cash in a market that is currently worth $1 trillion.
"The acquisition of Red Hat is a game changer. It changes everything about the cloud market," said Ginni Rometty, the chairman, president and CEO of IBM.
“IBM will become the world’s No 1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses. Most companies today are only 20% along their cloud journey, renting compute power to cut costs,” she said.
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“The next 80% is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales.”
Shares of Red Hat soared in the premarket by more than 50% to $177.70, having closed on Friday 3.19% lower to $116.68. Later in the session shares were up around 45% to $169.80.
IBM shares were off 3.37% to $120.59 in the Monday premarket, having closed on Friday at 124.79, down 1.31% on the day. Later they were down 3.17%
The two companies have been working together for more than 20 years.
MARKET REACTION MIXED
Reaction to the deal was not entirely positive.
"We question IBM's ability to extract incremental value from Red Hat taking into account its M&A track record and mixed stature in the developer community. Nonetheless, we don't see hurdles in closing and believe the odds of another party bidding as low," said Ittai Kidron, Vinod Srinivasaraghavan, and George Iwanyca of Oppenheimer Equity Research in a note to their clients.
Baird qeuity senior analyst Jonathan B. Ruykhaver said increased competition may be a motivation for the deal.
"We think the transformative nature of the acquisition is likely a response to the competitive pressures occurring for on-premise technology due to the rapid adoption of public cloud and the increasing relevance of hybrid technologies as organizations modernize legacy applications for private and public cloud," he said.
Reporting by Rene Pastor, contactable on rene.pastor@proactiveinvestors.com