This is the kind of news that takes you a while to process. One moment the open source community was worrying about how a code of conduct might change things for Linux as a whole, and one blink of the eye later we have International Business Machines (IBM) swallowing up Red Hat for $190 a share. IBM is completely buying out the company from its shareholders in a hostile takeover, and the deal is still subject to regulatory approval in various countries that both companies operate in. Still, it’s a lot to process.
UPDATE: A previous version of this article said that IBM had held talks with shareholders at Red Hat. This is incorrect, because in the press release it is stated that Red Hat’s board agreed to the purchase of the company, pending shareholder approval, and finally governmental approval. I apologise for the mistake.
In a press release sent out to investors and partners, IBM announced that it had concluded talks with the board of directors at Red Hat, agreeing to purchase all issued and outstanding shares for the company. Prior to the announcement, Red Hat, a company that curated the Red Hat Enterprise Linux distribution as well as the Gnome project, Fedora Project, and the free CentOS distro, had a market cap of $20.5 billion on the New York Stock Exchange. IBM’s deal was to purchase all shares at $190 per share, making the deal worth a whopping $34 billion. IBM’s market cap, for comparison, stands at just under $120 billion today.
“The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” said IBM chairman, president, and CEO Ginni Rometty, in the press release. “IBM will become the world’s #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”
“Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs,” Rometty said. “The next 80 percent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales.”
“Open source is the default choice for modern IT solutions, and I’m incredibly proud of the role Red Hat has played in making that a reality in the enterprise,” said Red Hat president and CEO Jim Whitehurst. “Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience – all while preserving our unique culture and unwavering commitment to open source innovation.”
Both companies have promised that things won’t change in the interim, but there’s a lot that will change anyway. Red Hat will, subject to approval of the deal, become a part of IBM’s Hybrid Cloud team, building solutions and services for IBM’s (and Red Hat’s) clients. IBM has become a service company these days, offering scaleable cloud storage and general-purpose computing power for distributed systems, and being able to align their offerings with Red Hat Enterprise Linux is a natural progression for the company because RHEL featured so heavily anyway.
There’s another component to this deal that creates more questions. IBM says that the acquisition “reinforces IBM’s high-value model. It will accelerate IBM’s revenue growth, gross margin and free cash flow within 12 months of closing. It also will support a solid and growing dividend”. For the better part of the last decade, IBM has seen revenues decline steadily as the cloud computing market becomes more saturated, and they’re up against giants like Amazon AWS, Microsoft Azure, and NVIDIA Grid which offer similar services, And Red Hat, which also offered software and services in the cloud computing market. With this deal, IBM is hoping that Red Hat’s good fortune carries over internally, enabling the company to show growth and profitability to its shareholders. IBM is using their cash reserves and new debt lines to buy Red Hat, so there’s a lot riding on the success of this deal.
Regulatory approval of the deal would mean that the two companies will become one at the end of 2019. In many forums and subreddits online, comparisons are being drawn to the hostile takeover of Sun Microsystems by Oracle. At the time, both companies were competitors in the same market segment, and Oracle viewed Sun as their main competitor. The buyout did not go well, despite pressure from the US government to make the deal go through, as Oracle slowly and systematically stripped all of Sun’s products from their roadmaps and began to force Sun’s customers to move their services and infrastructure over to Oracle’s products. They also sued literally anyone they could that they perceived as competition with their newly acquired trove of patents, making Oracle also the only Fortune 500 company that regularly engaged in patent trolling.
The Sun acquisition had such enormous consequences for the open-source community that the fallout continues to this day, almost a decade later. Projects like MySQL, Java for Android, OpenOffice, Project Kenai, and even the OpenSolaris Linux distribution were affected, and most of them died slow deaths as a result of a loss of the customer base and a brain drain from the company. Many of these projects were able to survive by forking the code while it was still open-source and licensed under the GPL, but that might not be possible with CentOS or Fedora in the future.