RALEIGH – Wall Street bulls are stampeding to buy Red Hat shares after the open source software and services giant announced Sunday that IBM is buying the firm for $34 billion.
Red Hat (NYSE: RHT) shares soared more than 50 percent in pre-market trading today to more than $177 a share. That’s a new 52-week high. By 2 p.m., demand for shares had cooled a bit yet Red Hat remained up 44 percent, or $51.50, at $168.18. Near the close, shares climbed back above $170.
However, investors apparently don’t like the deal from an IBM (NYSE: IBM) perspective. Based on the $190 a share offer for Red Hat, Big Blue apparently is seen as having paid too high a price.
IBM shares dipped 6 percent in pre-market trading to some $117 a share. At 2 p.m. shares were down 2.7 percent to $121.47. Near the close, shares dropped to $118.74, down 5 percent.
As trading began, IBM rallied a bit, cutting its loss to 3 percent.
In an interview with CNBC, however, IBM Chair and CEO Ginni Rometty said IBM didn’t pay too steep a price.
The $34 billion deal represents a huge premium over Red Hat’s market value of some $20 billion based on its Friday closing price.
On Sunday, Raleigh-based Red Hat, which is celebrating its 25th anniversary this year, will remain a “distinct unit” within IBM, CEO Jim Whitehurst told employees. The company has some 12,600 workers, 2,000 of which are based at its headquarters tower in Downtown Raleigh.
“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” said Ginni Rometty, IBM Chairman, President and Chief Executive Officer. “IBM will become the world’s #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.
IBM will acquire all of the issued and outstanding common shares of Red Hat for $190.00 per share in cash, representing a total enterprise value of approximately $34 billion. The deal is the result of a 20 year partnership, as IBM has long helped Red Hat develop and bring cloud solutions to customers.
“Powered by IBM, we can dramatically scale and accelerate what we are doing today. Imagine Red Hat with greater resources to grow into the opportunity ahead of us,” Whitehurst told employees in an email Sunday afternoon.
“Imagine Red Hat with the ability to invest even more and faster to accelerate open source innovation in emerging areas. Imagine Red Hat reaching all corners of the world, with even deeper customer and partner relationships than we have today. Imagine us helping even more customers benefit from the choice and flexibility afforded by hybrid and multi-cloud. Joining forces with IBM offers all of that, years ahead of when we could have achieved it alone. Together we can become *the* leading hybrid cloud solutions provider.”
Red Hat is based in Raleigh. IBM operates one of its largest corporate campuses in Research Triangle Park and employs several thousand people across the state.
Whitehurst also stressed that “Red Hat is still Red Hat.”
“Importantly, Red Hat is still Red Hat. When the transaction closes … we will be a distinct unit within IBM and I will report directly to Ginni,” he wrote.
“Our unwavering commitment to open source innovation remains unchanged. The independence IBM has committed to will allow Red Hat to continue building the broad ecosystem that enables customer choice and has been integral to open source’s success in the enterprise. IBM is acquiring Red Hat for our amazing people and our incredibly special culture and approach to making better software. They understand and value how and why we are different and they are committed to allowing us to remain Red Hat while scaling and accelerating all that makes us great with their resources.”
Both companies stressed the importance of cloud computing to the deal.
“Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs,” Rometty said. “The next 80 percent 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.”
Rometty also noted IBM’s long-term relationship in working with Red Hat.
“Today’s announcement is the evolution of our long-standing partnership,” Rometty added. “This includes our joint Hybrid Cloud collaboration announcement in May, a key precursor in our journey to this day.”
