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IBM takeover Red Hat: Good Deal or Bad Deal
On July 9 2019, IBM closed the acquisition of Red Hat, the biggest vendor of open-source software for $34 billion, which represents a 63% premium over the Red Hat’s closing price on the day before the merger announcement date.
IBM”s total debt of $62,899 million increased $17,087 million from prior year-end levels primarily to fund the acquisition of Red Hat. During 2019, IBM completed bond issuances totaling $25,712 million, with terms ranging from 2 to 30 years, and interest rates ranging from 0.375 to 4.25 percent depending on maturity, which includes Non-Global Financing debt of $38,173 million increased $23,587 million from prior year-end levels primarily driven by issuances to fund the Red Hat acquisition. IBM also increases the short term loan from $161 million to $971 million in 2019 in order to fund the debt interest expenses mainly driven by the acquisition.
According to the IBM and Red Hat’s acquisition statement, IBM’s cloud revenue has grown from 4 percent of total revenue in 2013 to 25 percent today. This growth comes through a comprehensive range of as-a-service offerings and software, services and hardware that enable IBM to advise, build, move and manage cloud solutions across public, private and on-premises environments for customers. IBM cloud revenue for the 12-month period through the first quarter of this year grew to over $19 billion. The Red Hat acquisition is expected to contribute approximately two points of compound annual revenue growth to IBM over a five-year period. Red Hat’s fiscal year 2019 revenue was $3.4 billion, up 15 percent year-over-year. Fiscal first quarter 2020 revenue, reported in June, was $934 million, up 15 percent year-over-year. In that quarter, subscription revenue was up 15 percent year-over-year, including revenue from application development-related and other emerging technology offerings up 24 percent yearover-year. Services revenue also grew 17 percent.
According to IBM’s 2019 annual report, IBM estimates the hybrid cloud market to be worthy $1.2 trillion dollars and IBM reported the $21.2 billion cloud revenue in 2019. According to the IBM and Red Hat’s acquisition statement, Digital reinvention is at an inflection point as businesses enter the next chapter of their cloud journey. Most enterprises today are approximately 20 percent into their transition to the cloud. In this first chapter of their cloud journey, businesses made great strides in reducing costs, boosting productivity and revitalizing their customer-facing innovation programs. Chapter two, however, is about shifting missioncritical workloads to the cloud and optimizing everything from supply chains to core banking systems. To succeed in the next chapter of the cloud, businesses need to manage their entire IT infrastructure, on and off-premises and across different clouds — private and public – in a way that is simple, consistent and integrated. Businesses are seeking one common environment they can build once and deploy in any one of the appropriate footprints to be faster and more agile. IBM’s offerings have evolved to reflect new customer needs and drive greater growth. The acquisition of Red Hat further strengthens IBM as the leader in hybrid cloud for the enterprise. Additionally, IBM and Red Hat have deep open-source values and experience. The two companies have worked together for more than 20 years to make open source the default choice for modern IT solutions. This includes the importance of open governance and helping opensource projects and communities flourish through continued contribution. With Red Hat, IBM has acquired one of the most important software companies in the IT industry. Red Hat’s pioneering business model helped bring open source – including technologies like Linux, Kubernetes, Ansible, Java, Ceph and many more – into the mainstream for enterprises. Today, Linux is the most used platform for development. Red Hat Enterprise Linux alone is expected to contribute to more than $10 trillion worth of global business revenues in 2019. By 2023, an additional 640,000 people are expected to work in Red Hat-related jobs.
Based on the project above, please write a 1500-word report evaluating the costs and benefits of IBM’s acquisition of Red Hat. Please evaluate whether the IBM’s acquisition of Red Hat is a good deal or bad deal by considering short- and long-term debt taken by IBM to fund the acquisition of Red Hat alongside projected growth opportunity in the Hybrid Cloud market and open-source projects brough by Red Hat.
(Due date: 23:59 PM (Sydney time: AEDT) May 14th 2021)