IBM to acquire Raleigh-based Red Hat for $34 billion

IBM will acquire Raleigh-based software maker Red Hat for $34 billion, the two companies announced Sunday.

IBM will acquire all common shares of Red Hat for $190 per share, the companies said. Red Hat’s stock had closed at $116.68 a share Friday, down from a peak in June of about $175.

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Red Hat employees walk back to their Raleigh headquarters after a meeting at the Duke Energy Center for the Performing Arts Monday, Oct. 29, 2018. Travis Long tlong@newsobserver.com@newsobserver.com

IBM, which has a campus in Research Triangle Park, says it intends to keep Red Hat based in downtown Raleigh. The company has more than 2,000 employees at its headquarters tower, making it one of the city’s largest employers. Red Hat has been downtown since 2013, when it moved its headquarters from N.C. State University’s Centennial Campus to the tower in 2013, bringing around 600 employees at the time.

Worldwide, the company had approximately 12,600 employees as of August 2018 and has a market valuation of $20.5 billion, Bloomberg reports.

According to Bloomberg, which first reported the deal, it is the biggest-ever acquisition for New York-based IBM, and one that analysts say should help the computer giant compete with younger tech companies.

IBM’s revenue has declined by almost a quarter since 2012, mostly from declining sales in existing services, Bloomberg reported.

Ginni Rometty, IBM’s chairman, president and chief executive officer, called the acquisition “a game-changer.”

“It changes everything about the cloud market,” Rometty said in a prepared statement. “IBM will become the world’s No. 1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”

IBM said Red Hat will join its Hybrid Cloud team as a distinct unit, “preserving the independence and neutrality of Red Hat’s open source development heritage and commitment, current product portfolio and go-to-market strategy, and unique development culture.” Red Hat’s current management team, led by president and CEO Jim Whitehurst, will remain in place. Whitehurst will report to Rometty.

The boards of both companies have approved the deal, though it is still subject to Red Hat shareholder approval. It also is subject to regulatory approvals and other customary closing conditions and is expected to close in the latter half of 2019.

“IBM’s commitment to keeping the things that have made Red Hat successful — always thinking about the customer and the open source community first — make this a tremendous opportunity for not only Red Hat but also open source more broadly,” Paul Cormier, Red Hat’s president for products and technologies, said in a statement.

“Since the day we decided to bring open source to the enterprise, our mission has remained unchanged. And now, one of the biggest enterprise technology companies on the planet has agreed to partner with us to scale and accelerate our efforts, bringing open source innovation to an even greater swath of the enterprise.”

Whitehurst emphasizes resources

In an email to employees, Whitehurst said the deal will give Red Hat the resources to be more innovative.

“Imagine Red Hat with greater resources to grow into the opportunity ahead of us,” Whitehurst wrote. “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. ... Joining forces with IBM offers all of that, years ahead of when we could have achieved it alone.”

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Red Hat employees walk back to their Raleigh headquarters after a meeting at the Duke Energy Center for the Performing Arts Monday, Oct. 29, 2018. IBM will acquire the Raleigh-based software maker in a $34 billion deal, the two companies announced Sunday. Travis Long tlong@newsobserver.com@newsobserver.com

Bridget Harrington, executive director of Innovate Raleigh, said that while in some ways it is bittersweet to lose a corporate headquarters in downtown Raleigh, this is still a phenomenal outcome for a homegrown company and the local investment ecosystem.

“This definitely turns up the dial for the investment community,” Harrington said. “We now have more folks with more money (in their pockets) to reinvest in the community. It is up to those folks to keep that money in the community and make more bets in Raleigh.”

Over the years, many ex-Red Hatters have gone on to start new companies, with the capital from the company’s initial public offering, including companies like Pendo, which has raised more than $100 million and employs hundreds.

The Triangle has now had two multibillion-dollar announcements in one week, with Epic (maker of popular video game Fortnite) getting a $15 billion valuation from investors, said Harrington. “This is massive and a great indicator for a healthy, mature ecosystem that is only going to get stronger,” she added.

Red Hat’s beginnings

Entrepreneur Bob Young founded Red Hat in 1993 to sell Linux and Unix software accessories. It took its name after a merger with Marc Ewing’s company Red Hat Linux.

The company went public in 1999, originally issuing stock at $14 per share.

Red Hat considered moving its headquarters out of Raleigh in 2011, and looked at Atlanta and Austin among other cities. It chose to stay, and its name has become one of the most prominent in Raleigh, appearing on the city’s downtown amphitheater and atop its office tower at Wilmington and Cabarrus streets.

Red Hat now has more than 95 offices worldwide, including major software-engineering groups in San Francisco and Boston and a public-policy operation in Tyson’s Corner, Va., near the nation’s capital.

Richard Stradling: 919-829-4739, @RStradling