Technology

As IBM's $34 Billion Red Hat Acquisition Closes, Investors Unmoved

Paul Ausick

Published: July 9, 2019 1:55 pm

Last Updated: January 30, 2020 6:51 pm

Shares of International Business Machines Corp. (NYSE: IBM) didn’t fall to a 52-week low last October when the company announced its $34 billion agreement to acquire cloud software maker Red Hat. It took about two more months for the price to reach its bottom.

Since then, Big Blue’s stock has been slowly gaining back some of that loss, reaching a peak of around $142 a share in April. Now that the deal for Red Hat is officially closed, IBM’s stock traded Tuesday at around $140. At that level, the shares have gained about 12% since the deal for Red Hat was announced.

When she announced the deal, IBM CEO Ginni Rometty said:

The acquisition of Red Hat is a game-changer. It changes everything about the cloud market. 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.

By “hybrid cloud,” Rometty means an open-source platform that has to run on competing systems from leading vendors like Amazon’s AWS, Microsoft Azure and Google Cloud. IBM’s hybrid, multi-cloud platform is a first, Rometty claims.

Since 2013, IBM’s cloud services revenue has grown from 4% of total company revenues to 24%, and the company expects Red Hat to add about two points of compound annual growth to that over a five-year period. The big idea is that the IBM/Red Hat platform will permit companies to behave completely agnostically to data stored on-site and on private or public clouds.

IBM’s cloud offerings needed a boost, and the deal for Red Hat may give them one. The company lost out to Google on a multibillion Central Intelligence Agency high-security cloud contract in 2013 and, more recently, was eliminated from a $10 billion Defense Department project for storing massive volumes of classified data to enhance the country’s war planning and fighting capabilities. There was a time, within living memory, when IBM likely would have won one if not both of such federal contracts.

In the early afternoon Tuesday, IBM stock traded down about 0.9% to $139.37, in a 52-week range $105.94 to $154.36 and with a price target of $147.21.