International Business Machines or, IBM, is involved in the largest acquisition of its century of existence by making an all-cash, $33 billion dollar purchase of Red Hat, a company that offers a high-end software business to complement that of IBM’s as well as a hybrid cloud services business.
Because Red Hat does a significant amount of business with IBM’s competitors, the merger will have to be closely monitored in order to provide integration of the two companies. Red Hat will maintain its independence from IBM, operating as an independent unit under the leadership of its current CEO Jim Whitehurst, who will report directly to IBM CEO Ginni Rometty. This arrangement is not unprecedented in modern times and has worked well for VMware, the company that was first purchased by EMC and is now owned by Dell. VMware operates successfully as a stand-alone company. IBM needed to do something different – its revenue peaked in 2011 and free cash flow peaked a year later. The market tends not to treasure shrinking tech companies; thus, the need for that proverbial “shot in the arm.” Dan Gallagher, writing in the WSJ, has said that IBM is taking a big risk by buying Red Hat, but that doing nothing would have been riskier. Red Hat’s projected $3.4 billion revenue for the year will add about 4% to IBM’s total. But, as with Johnson & Johnson that we discussed in yesterday’s post, it’s the optics that are more important. And, I believe that Gallagher is right when he says that, “Buying Red Hat should give Big Blue’s cloud a much-needed lift.” Here’s to entrepreneurs who run large corporations.