Netease Technologies News October 29, according to Bloomberg, IBM announced today that it will spend $34 billion to buy Red Hat Inc. Red Hat was one of the most successful pioneers of the open source software movement, which allowed anyone to view and modify programming instructions.
Red Hats Linux version of open source software is widely used on corporate computer servers and is one of the factors driving the abandonment of bulky mainframes sold by IBM and others. Recently, Red Hat has become a major advocate of cloud computing and an alternative to technology giants like Amazon and Microsoft, which want to attract customers through their proprietary cloud computing technologies.
If we fight alone, IBM and Red Hat Inc are bound to lag behind in computing industry. IBM is too dependent on the past to foresee the future of technology. Red Hat Inc is too small to compete with giants. But with the $34 billion deal, the two companies may be able to work together to chart a new course of development. IBM paid a high price for the acquisition, but if properly managed, the merger could pose a serious threat to Amazon, Microsoft and other companies that are trying to reshape the computing industry, which is worth $2 trillion.
The acquisition price reflects how eager IBM is to change its position as a company with difficult growth and confused strategic directions. IBM will buy Red Hat for $190 a share, more than 60% above Red Hats recent share price premium. According to data compiled by Bloomberg, IBMs offer has pushed Red Hats P/E ratio to an astonishing 51 times. In addition to a few rapidly growing software companies, the P / E ratio is higher than that of all other companies.
More than $33 billion in cash acquisitions is equivalent to IBMs free cash flow at current levels for the next two and a half years. Yes, the acquisition of Red Hat did bring IBM with growing revenue and free cash flow, but it was a big bet for IBM Chief Executive Ginni Rometty. However, strategically speaking, making this bet may be the best choice for Roy LAN. In itself, IBM is bound to shrink both in terms of revenue and technology relevance, although the company has been boasting about how much it is becoming a technology leader. But it is not.
Red Hat Inc is also strategically difficult. It is too small to be compared to Amazon, Microsoft, Google, Oracle and other technology giants; if sold, it is considered too large to be easily targeted by these giants.
In a statement on the acquisition, IBM and Red Hat emphasized that they would promote a technology called a hybrid cloud that fuses computerized data from companiesown data centers with data managed by cloud computing providers. Whether hybrid cloud computing will prove to be a persistent technology or just a way to outsource enterprise computing to powerful cloud computing controlled by Amazon and other companies remains an open question. The merger of IBM and Red Hat needs to prove strongly why companies should bet on them rather than trust Microsoft, Oracle or other companies that are also driving hybrid cloud computing.
Its not easy, but the combination of IBM and Red Hat is undoubtedly more attractive than their individual struggle. Fighting together with technology giants may be their best choice.
IBM said it would pay the cost of acquiring Red Hat Inc in combination with cash and issuance obligations. It also said it would aim to maintain the companys strong investment grade credit rating.