IBM’s $34 billion acquisition of Red Hat, the third-biggest tech deal in U.S. history, caps an incredible run for the Raleigh-based company that Bob Young and Matt Ewing started in 1993-94. Providing open-source software was an audacious idea that poked at operating-system powerhouses Microsoft and Apple. An initial question was how a business based on providing something for free had any potential for profit.
But Red Hat figured it out under leadership of Young; Matt Szulik, who was CEO from 1998-2007; and Jim Whitehurst, who has been in charge over the last decade. The company became a pillar of the Triangle’s tech community and downtown Raleigh, where more than 2,000 employees fill a 19-story tower that was the headquarters of Progress Energy. Overall, Red Hat employs 12,600.
IBM, which once employed more than 20,000 people in North Carolina, has plateaued with nearly six years of declining sales, reversing slightly earlier this year. In 1990, when Microsoft issued its Windows 3.0 product, IBM had annual revenue of $69 billion, while Microsoft had about $800 million. Twenty-eight years later, IBM has revenue of about $80 billion, while Microsoft now tops $100 billion.
Big Blue paid about 11 times Red Hat’s annual revenue, a premium that suggests the company wasn’t for sale but couldn’t turn down such a rich offer, according to the VentureBeat online newsletter. Red Hat provides a growth vehicle because its Linux business is used by many companies expanding their artificial intelligence and data-analytics workloads. It collects subscriptions for the software’s usage on cloud platforms run by Amazon, Microsoft and Google.
Meeting with staffers in early November, Whitehurst emphasized that Red Hat will operate as a distinct unit from IBM, which is known for a more buttoned-down culture than the Raleigh upstart. “I want to be clear, that’s not just for culture. For our customers, we have to be the neutral, 100% open-source platform that we’ve always been,” according to a filing showing his comments. No layoffs are planned, Whitehurst said.
IBM also may be gaining a potential successor to CEO Ginni Rometty, 61, who has had the job since 2012. Whitehurst is about 10 years younger than his new boss and among the most highly touted leaders in corporate America.
The deal is expected to close in the second half of 2019.
(An earlier version of this story gave incorrect information on the value of IBM’s offer related to Red Hat’s earnings.)