IBM has stepped up to buy Red Hat. Red Hat is a well known distributor of Linux which is aimed at enterprise customers. IBM has offered $34 billion in cash which is a large premium over the Friday close for Red Hat. The move by IBM brings them more in tune with the growth story of cloud services.
Red Hat started 25 years ago with a custom distribution of Linux, an open-source operating system that is commonly used in server computers that power company data centers. Red Specialized on enterprise services and support.
IBM will suspend share repurchases in 2020 and 2021, but won’t touch its dividend. The pause is a cautionary measure as the company plans on returning to its normal leverage ratio in about two years.
IBM sells machines for Linux which we see as a natural fit for the company looking forward. IBM has struggled to maintain the mainframe business which has slowly declined over time. Mainframes are still used as a super server for some government and corporate users.
Red Hat creates, maintains, and contributes to many free software projects. It has acquired several proprietary software product codebases through corporate mergers and acquisitions and has released such software under open-source licenses. In 2016, Red Hat became the second largest contributor to the Linux Kernel behind Intel who continues to hold the top spot.
Open source has grown over time and IBM has long history of open source. IBM historically distributed operating systems as open source for mainframes.
IBM has been able to improve their services division which has seen much growth over time. Cloud services with IBM include even running mainframe applications in the cloud. The deal with Red Hat will improve IBM’s cloud services. No question that the IBM directors noticed the success of Azure and AWS to realize where the action is.
Open source has been big this year, recall Microsoft bought Github for open source projects. It does appear that open source is now becoming more mainstream.