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IBM Buys Red Hat: Big Price Tag, Alternative Bidders?

Will IBM's proposed buyout of Red Hat attract alternative bidders like Amazon Web Services (AWS), Cisco Systems, Google, Microsoft or Oracle? ChannelE2E is doubtful, considering Red Hat's lofty price tag.

IBM is paying a hefty $34 billion for Red Hat -- a 60 percent premium to Red Hat’s most recent stock price, Bloomberg notes. Also, IBM’s offer values Red Hat at an eye-popping 51 times its estimated adjusted earnings for the next year, according to data compiled by Bloomberg. That’s a richer valuation than all but a tiny handful of fast-growing software companies, the report says.

Those rich multiples suggest that Red Hat already pursued bids from multiple companies -- perhaps forcing IBM to open its wallet even wider to that $34 billion level.

Why Red Hat Matters

Red Hat isn't all that big but the company certainly is strategic. In many cases, the Linux provider is considered a Switzerland for the cloud era -- essentially providing system software that runs in various public clouds. Red Hat also has a strong foothold in on-premises data centers.

Amid those realities, the company likely attracted buyout interest from AWS, Cisco, Google and Oracle in recent years, ChannelE2E believes. But ultimately, it looks like IBM wrote a huge check to chase away the threat of rival bids for Red Hat.

Why would IBM pay such a big premium? The answer involves IBM's falling top-line revenues. Also, IBM's cloud is growing -- but not nearly as fast as AWS, Azure, Google and China's Alibaba.

Alternative Linux Buyouts?

Amid the Red Hat buyout, we suspect IBM's rivals will take a closer look at such Red Hat rivals as Canonical Ubuntu and SUSE Linux. We'll be watching for closer strategic alliances or outright buyouts in the months ahead.

Disclosure: I've been long on Red Hat stock for about a decade, and plan to sell my shares when U.S. markets open on Monday, October 29.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.