11.14 Monday 29 October 2018

The battleground for domination in the cloud computing sector has shifted with the announcement of IBM’s $34bn acquisition of Red Hat in what has been called the "most significant tech acquisition of 2018".

During the Q3 reporting season, cloud services featured heavily for the main players in the sector with their performance featuring heavily for the likes of Amazon, Google and Microsoft. With the purchase of Red Hat, IBM looks to place itself in the forefront of the market as tech sees cloud services as a path to future growth and revenue.

As rivals Amazon saw a growth of 46% in their cloud service (AWS) in Q3, Google and Microsoft also saw increased earnings and whilst IBM saw $8.3bn revenue from technology services and cloud platforms, this figure was under analyst estimates and likely prompted the need to make the acquisition. Amazon, Google and Microsoft are all current customers of Red Hat and it is believed that these partnerships will continue.

IBM CEO Ginni Rometty was quoted as saying "The acquisition of Red Hat is a game-changer. It changes everything about the cloud market", following with "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".

Red Hat has been known for their open source product which allows developers to work on and modify and improve on code within a community and it is not initially clear how the IBM purchase will affect this model or how the community will react to a major tech player buying up an open source platform.

The purchase came at a 63% premium of the closing price on Friday which will pay $190ps and it is understood that the deal will be financed via free cash flow and gross margin accrued within 12 months and it has also caused IBM to suspend share buyback programs scheduled for 2020 & 2021. IBM is set to go ex-dividend on 8th November but the boost to their cloud services is tipped to be a big boost to revenue and to support a growing dividend in the near future.

At the time of this publication, International Business Machines was trading down nearly 6% in pre-market trading, while Red Hat is over 50% up.

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