The $34 billion acquisition of Red Hat will shape company's
cloud strategy
By Asa Fitch
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 10, 2019).
International Business Machines Corp. closed its roughly $34
billion acquisition of open-source software company Red Hat Inc.,
the company said, a 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 -- 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 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 Red Hat's 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, and perceptions of its impartiality 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 had $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 stock outstanding.
IBM shares closed down 0.9% at $139.33.
Red Hat Chief Executive Jim Whitehurst will continue to lead the
business and 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," Mr. Campbell said.
As a protégé of her predecessor Sam Palmisano, Ms. Rometty saw
her career 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 had $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 10, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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