Running head: IMB TAKEOVER RAD HAT: GOOD DEAL OR BAD DEAL 1

Student ID : 202110421
Name: Waji Uddin Zubair Mohammed

IBM takeover Red Hat: Good Deal or Bad Deal

IMB TAKEOVER RAD HAT: GOOD DEAL OR BAD DEAL 2

IBM takeover Red Hat: Good Deal or Bad Deal

Introduction

International Business Machines Corp. (IBM) is a technological organization that closed

the Red Hat Inc. acquisition for $34 billion that is an open-source organization that is considered

one of the most expensive deals. The headquarter of IBM is in Armonk, New York. According to

the company, this business deal was about 108 years old with the technological giant. It

facilitates this technologically giant to define the legacy of Chief Executive Ginni Rometty.

Charles Ranlett Flint was the founder of IBM and the company was established in 1911. It was

founded by the name computer-tabulating-recording (Newsroom.ibm.com, 2021).

It is expected that this acquisition deal will soon get again in the segment of cloud

computing as compared to its competitors. This system helps users to store their important

information in cloud rater in their machines. IBM is an early proponent of acquiring Red Hat and

this deal makes the position of IBM strong, especially in cloud computing. However, IBM is

behind the Amazon and Microsoft Crop which has made their position strong in the booming

market. The IBM counterpunch court companies keep the desire to utilize the cloud system,

however, keep the most critical information locked in their machines and this model is dubbed

hybrid cloud (Newsroom.ibm.com, 2021).

Costs Analysis of Acquisition Deal

This acquisition deal has both costs and benefits for IBM. In terms of cost, the acquisition

deal of red Hat has the requirement by IBM to take debt as it is the most expensive deal and

increases the debt burden of the company, however, the company must pay attention to reducing

its debt load in the coming years. This deal increases its burden of debt of IBM from $62,899
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million and that increase was about $17,087 million. This makes it necessary for IBM to make

the availability of cash sure by buyback its shares to repay. In the year 2019, the issuance of the

bond by IBM has completed 2019 about $25,712 million that has a term of 2-30 years with an

interest rate from 0.375% - 4.255% that may depend upon the term of maturity. IBM also has to

face an increase in its short-term loans in 2019 from $161 million to $971 million (Swanner,

2018).

Benefits Analysis of Acquisition Deal

The acquisition of Red Hat is also beneficial for the success and growth of IBM. In the

year 2019, IBM remain successful in generating revenues of about $3.4 billion with the

expectation that this revenue generation stream remains to continue at double-digit. Red Hat is

also a profitable organization that is also a fundamental reason for the increase in the revenue of

IBM in the coming years. This acquisition deal is also beneficial for IBM because it allows the

company to cross-selling which is a tool for the growth of IBM. The expectations of 2% growth

are also part of this acquisition deal. This deal enhances the potential of earning IBM to

strengthen and profitability of Red Hat and it may increase the IMB’s gross margin along with

the GAAP earnings with time. There is a hope that IBM generate the revenue in near future as

Red Hat is a stand-alone company that keeps a cash flow of $1 billion (Gillin, 2019).

Evaluation of Acquisition Deal

By making the analysis of the IBM acquisition of the Red Hat deal, it can be observed

that this deal proves profitable for IBM overall and also increase the growth potential of IBM

due to many factors like the feature of cross-selling. This deal is so profitable and has the

potential to increase its revenue of IBM by 25%. It just not proves profitable but also make the
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image of company strong and make it good in hybrid cloud. So, this acquisition deal is a good

opportunity for the company and IBM needed to make this deal successful even by borrowing or

taking debt. There is no doubt that the dominant players of this public infrastructure are

Microsoft Corp and Amazon, however, it is expected that this acquisition deal may increase the

growth of IBM and also make it a leader in this segment of cloud. The large companies keep the

complex system of information technology that make it hard for them to move their wholesales

to the public. The impact to make use of a hybrid multi-cloud to manage complexity is definite.

To make this deal successful, Red must play a neutral role (Tozzi, 2021).

The Red Hat acquisition can increase the revenue for IBM and reduce the value of its

share which has the potential to make its revenue flexible. Now the technology companies are

preferring to work more in the cloud world continuously making agility important. This deal can

provide essential growth to IBM by making use of different options that may make IBM more

profitable. The company is now a strong part of the cloud world that increase agility and bring

expansion in revenue by about 6.84 billion dollars in the first quarter that increasing the

disappointment of Wall Street. So, these are the reasons that make IBM monolithic and make it

able to sell its services of consultancy (Tozzi, 2021).

Hybrid Cloud’s Projected Growth Opportunity

The Red Hat acquisition makes IBM the largest provider of hybrid cloud and also

increases the level of competition in this industry. IBM also take this deal seriously and assure

that it will consider the legacy of Red Hat seriously and innovate by following the patterns of

Red Hat. IBM also provide power to the developer community and accelerate the adoption of

open source that is based on customers to adopt the next-generation platform of hybrid cloud. All
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this is based on technology just as example Kubernetes as well as Linux that facilitates the

customers to manage data and different applications in public and private clouds on-premises.

It is also affecting that IBM pays less attention to the hybrid cloud opportunity which is 1

trillion dollars. IBM announced it recently that a company may be divided into two different

organizations that facilitate the growth strategy of the hybrid cloud. This decision may also bring

digital transformation and also bring optimization in the performance level of new companies by

making use of artificial intelligence and automation by supporting the companies to bring

efficiency and agility to their infrastructures (Green, 2019).

IBM lean on Red Hat which is also considered an open-source solution provider

company as it facilitates its potential client to unlock the cloud value fully and offer a next-

generation multi-cloud platform. The platform of cloud is based on Red Hat's open shift that

approaches hybrid cloud able to get more value. The other factor that is critical for the success of

this acquisition day is the Red Hat as well as IBM's ability to win the hearts and minds of its

development and allow them to perform a decision-maker role in the cloud journey. The

developer's point hit the rise that is tipping for almost five years with cloud computing success.

The developers must show their concerns about IBM that may take developers back to the dark

age of pre-cloud and the pre-DevOps age is considered one of the monolithic platforms that are

based on top-down CxO’s supreme reigned (Gillin, 2019).

Conclusion

Based on the above discussion, it can be concluded that the acquisition deal of Red Hat

by IBM is a fruitful deal along with the fact that this deal has both costs and benefits for IBM.

The cost aspects of this deal indicate that when it decided to acquire Red Hat then it became
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necessary for it to take debts as this was one of the most expensive deals in the history of IBM.

With the acquisition of Red Hat, the burden of tax arrived on IBM. However, on the benefits

side, it can see that Red Hat is a profitable company and have a good technological revolution

along with a strong system of cloud. This acquisition day makes it possible for IBM to compete

with Amazon and Microsoft corporation. The acquisition of Red Hat opens many opportunities

and ways of success for IBM. The profitability of IBM, as well as Red, had made this possible

for IBM to repay all the debts as soon as possible and the profitability of IBM in the first and

second quarters also witnessed that this day increase the profitability potential of IBM. So,

overall, this is a profitable deal for IBM and increase not only revenue of IBM but also make its

position strong in the hybrid cloud world.

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References

Gillin, P. (2019, 07 09). After closing Red Hat acquisition, IBM bids for hybrid cloud

dominance. Retrieved from https://siliconangle.com/2019/07/09/bidding-hybrid-cloud-

dominance-ibm-closes-red-hat-acquisition/

Green, T. (2019, 07 09). IBM Closes Its $34 Billion Red Hat Acquisition. Retrieved from

https://www.fool.com/investing/2019/07/09/ibm-closes-its-34-billion-red-hat-

acquisition.aspx

Newsroom.ibm.com. (2021, 01 01). IBM To Accelerate Hybrid Cloud Growth Strategy And

Execute Spin-Off Of Market-Leading Managed. Retrieved from

https://newsroom.ibm.com/2020-10-08-IBM-To-Accelerate-Hybrid-Cloud-Growth-

Strategy-And-Execute-Spin-Off-Of-Market-Leading-Managed-Infrastructure-Services-

Unit

Swanner, N. (2018, 10 30). IBM Buys Red Hat: What the Deal Means for Tech Pros. Retrieved

from https://insights.dice.com/2018/10/30/ibm-red-hat-deal-tech-pros/

Tozzi, C. (2021, 04 05). The 'Other' Hybrid Cloud Providers: IBM, Oracle and Cisco. Retrieved

from https://www.itprotoday.com/hybrid-cloud/other-hybrid-cloud-providers-ibm-oracle-

and-cisco