IBM acquires software company Red Hat after facing revenue decline for the last five years

IBM Corp is all set to acquire US software company Red Hat Inc for USD34 billion, including debt, as it is looking to expand its hardware technology and consulting house into high earning products and services.

Investors have continued to grow impatient as IBM saw a revenue decline almost every quarter after Ginni Rometty took the role of chairman and chief executive officer in 2012. Warren Buffett gave up on IBM last year as his conglomerate, Berkshire Hathaway reduced its stake in the company by almost 94 per cent and invested in Apple Incorporation, reported Bloomberg Quint. The stock declined 19 per cent this year and nearly 31 per cent in the last five years, making IBM's market value USD114 billion.

Rometty stated that "The acquisition of Red Hat is a game-changer. It changes everything about the cloud market". IBM will continue to grow its dividend, without cutting jobs after the deal, she added. "This is an acquisition for revenue growth, this is not for cost synergies," she said. The Red Hat deal represents an admission by Rometty that in house growth wasn't going to be enough to keep IBM from falling permanently behind in a market that is growing in importance and size.

The company has fought to compete with younger technology, because of divestitures, that are mostly from dipping sales in existing hardware, software and services offerings. Rometty has been trying to make IBM more of modern businesses utilising the cloud technology, artificial intelligence and security software with uneven results.

The 107 year old computer services giant, IBM's cash deal, increases its credentials in the fast growing cloud and gives it the much needed boost for raising revenue. The mainframe computing company has been sluggish to adopt cloud related technologies and had catch up to market leaders Microsoft Corp. and Amazon Inc. regarding offering services over the internet.

IBM will pay USD190 a share in cash for Raleigh, North Carolina based Red Hat, according to a statement from the companies on Sunday. That's almost 63 per cent premium over Red Hat's per share price of USD116.68. Rometty said that IBM "paid a very fair price. This is a premium company. If you look underneath, this is strong revenue growth, strong profit strong free cash flow."

Revenue at Red Hat is expected to increase by USD3 billion for the first time this year as the company's Linux product will attract business from large customers. The company reported a record 11 contracts in last quarter, valued at over USD5 million each and 73 over USD1 million, according to Greg McDowell, JMP Securities analyst. JPMorgan Chase and Co. and Goldman Sachs Group Inc. and Lazard Ltd. were advisers on the deal. Guggenheim Partners and Morgan Stanley were financial advisers to Red Hat, while Skadden Arps Slate Meagher and Flom assisted with legal aid.

(Edited by Vivek Dubey)