RHT Red Hat

By Asa Fitch 

International Business Machines Corp. closed its roughly $34 billion acquisition of open-source software company Red Hat Inc., the company said, an unprecedented deal for the 108-year-old tech giant that will help define Chief Executive Ginni Rometty's legacy.

With Red Hat, the most expensive deal in IBM's history, the company hopes to gain on competitors in cloud computing -- a form of computing where users store information remotely instead of on their own machines. IBM was an early proponent of the cloud more than a decade ago, but it fell behind as Amazon.com Inc. and Microsoft Corp. gobbled up the majority of the now-booming market.

IBM's counterpunch has been to court companies that want to use the cloud but keep their most sensitive data locked down on internal computers -- a model dubbed the "hybrid cloud." Red Hat, which counts thousands of companies among its customers, fits into that strategy

"I view this as a defining moment in IBM's cloud journey," Ms. Rometty said. "This puts us in position in hybrid cloud."

Red Hat will exist as a separate business unit within IBM and will be neutral when it comes to which companies' cloud-computing services it steers clients, the companies said, addressing concerns that a full-on integration could damage its reputation in the market and hurt customer relationships. Red Hat built its success by enmeshing itself in the collaborative culture around Linux, the open-source operating system, which could have been called into question if it were seen to favor its owner's products over the competition.

Red Hat, based in Raleigh, N.C., is the dominant player in the business of providing support for companies that use Linux. Linux is free for anyone to use, but Red Hat makes money by offering its own version of the software, along with training and technical support. The company made $3.4 billion of revenue in the year ended in February.

The deal was closed on the early side of IBM's expectation of a close in the second half of this year. Following antitrust scrutiny from a long list of global regulators, the U.S. approved the deal in May and the European Union approved it last month.

IBM paid $190 a share to acquire Red Hat's outstanding stock. Through Tuesday's close, shares in IBM have gained about 12% since the deal was announced in October, despite showing declines in the first few days as investors digested the news.

Red Hat Chief Executive Jim Whitehurst will continue to lead the business, and he will serve as an IBM senior vice president, reporting directly to Ms. Rometty.

IBM's success or failure with Red Hat will shape how Ms. Rometty's time at the helm is viewed, analysts say.

"Closing the Red Hat deal starts the clock ticking on Ginni Rometty's Red Hat investment and IBM's cloud initiative," said Ian Campbell, CEO of Boston-based Nucleus Research, who has been critical of Ms. Rometty's leadership. "Amazon and Microsoft are far ahead in that race and IBM will need to do a lot more than promote a hybrid model to distinguish itself."

As a protégé of her predecessor Sam Palmisano, Ms. Rometty's career was propelled by the successful integration of IBM's acquisition of Pricewaterhousecoopers's IT consulting arm in 2002. That deal, however, was far smaller in price and in importance to the company's future.

Since becoming chief executive in 2012, Ms. Rometty's career has been marked by the company's gradual decline, as attempts to capitalize on growth in cloud computing and artificial intelligence have so far failed to make up for legacy businesses that are losing steam.

IBM posted 22 straight quarters of year-over-year revenue declines until it grew in the last quarter of 2017. Two more quarters of growth, however, were followed by more declines, raising further questions about Ms. Rometty's ability to turn the company around.

Despite the revenue drops, IBM has pointed to growth in its cloud-computing business as a bright spot. The company said it made $19 billion of cloud revenue in the year ending in its first quarter.

Write to Asa Fitch at asa.fitch@wsj.com

(END) Dow Jones Newswires

July 09, 2019 16:40 ET (20:40 GMT)

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