IBM takeover Red Hat: Good Deal or Bad Deal
On July 9 2019, IBM closed the acquisition of Red Hat, the biggest vendor of open–source
software for $34 billion, which represents a 63% premium over the Red Hat’s closing price on
the day before the merger announcement date.
IBM”s total debt of $62,899 million increased $17,087 million from prior year–end levels
primarily to fund the acquisition of Red Hat. During 2019, IBM completed bond issuances
totaling $25,712 million, with terms ranging from 2 to 30 years, and interest rates ranging from
0.375 to 4.25 percent depending on maturity, which includes Non–Global Financing debt of
$38,173 million increased $23,587 million from prior year–end levels primarily driven by
issuances to fund the Red Hat acquisition. IBM also increases the short term loan from $161
million to $971 million in 2019 in order to fund the debt interest expenses mainly driven by
the acquisition.
According to the IBM and Red Hat’s acquisition statement, IBM’s cloud revenue has grown
from 4 percent of total revenue in 2013 to 25 percent today. This growth comes through a
comprehensive range of as–a–service offerings and software, services and hardware that enable
IBM to advise, build, move and manage cloud solutions across public, private and on–premises
environments for customers. IBM cloud revenue for the 12–month period through the first
quarter of this year grew to over $19 billion. The Red Hat acquisition is expected to contribute
approximately two points of compound annual revenue growth to IBM over a five–year period.
Red Hat’s fiscal year 2019 revenue was $3.4 billion, up 15 percent year–over–year. Fiscal first
quarter 2020 revenue, reported in June, was $934 million, up 15 percent year–over–year. In that
quarter, subscription revenue was up 15 percent year–over–year, including revenue from
application development–related and other emerging technology offerings up 24 percent year–
over–year. Services revenue also grew 17 percent.
According to IBM’s 2019 annual report, IBM estimates the hybrid cloud market to be worthy
$1.2 trillion dollars and IBM reported the $21.2 billion cloud revenue in 2019. According to
the IBM and Red Hat’s acquisition statement, Digital reinvention is at an inflection point as
businesses enter the next chapter of their cloud journey. Most enterprises today are
approximately 20 percent into their transition to the cloud. In this first chapter of their cloud
journey, businesses made great strides in reducing costs, boosting productivity and revitalizing
their customer–facing innovation programs. Chapter two, however, is about shifting mission–
critical workloads to the cloud and optimizing everything from supply chains to core banking
systems. To succeed in the next chapter of the cloud, businesses need to manage their entire IT
infrastructure, on and off–premises and across different clouds — private and public – in a way
that is simple, consistent and integrated. Businesses are seeking one common environment they
can build once and deploy in any one of the appropriate footprints to be faster and more agile.
IBM’s offerings have evolved to reflect new customer needs and drive greater growth. The
acquisition of Red Hat further strengthens IBM as the leader in hybrid cloud for the enterprise.
Additionally, IBM and Red Hat have deep open–source values and experience. The two
companies have worked together for more than 20 years to make open source the default choice
for modern IT solutions. This includes the importance of open governance and helping open–
source projects and communities flourish through continued contribution. With Red Hat, IBM
has acquired one of the most important software companies in the IT industry. Red Hat’s
pioneering business model helped bring open source – including technologies like Linux,
Kubernetes, Ansible, Java, Ceph and many more – into the mainstream for enterprises. Today,
Linux is the most used platform for development. Red Hat Enterprise Linux alone is expected
to contribute to more than $10 trillion worth of global business revenues in 2019. By 2023, an
additional 640,000 people are expected to work in Red Hat–related jobs.
Based on the project above, please write a 1500–word report evaluating the costs and
benefits of IBM’s acquisition of Red Hat. Please evaluate whether the IBM’s acquisition
of Red Hat is a good deal or bad deal by considering short– and long–term debt taken by
IBM to fund the acquisition of Red Hat alongside projected growth opportunity in the
Hybrid Cloud market and open–source projects brough by Red Hat.
(Due date: 23:59 PM (Sydney time: AEDT) May 14th 2021)
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