IBM pursues Amazon into cloud with $33-billion Red Hat deal

IBM’s $33-billion purchase of Red Hat Inc. — the world’s second-largest technology deal ever — is aimed at catapulting the company into the ranks of the top cloud software competitors.

The cash deal, IBM’s biggest by far, boosts the 107-year-old computer-services giant’s credentials overnight in the fast-growing and lucrative cloud market — and gives it much-needed potential for real revenue growth. The company once synonymous with mainframe computing has been slow to adopt cloud-related technologies and has had to play catch-up to market leaders Amazon.com Inc. and Microsoft Corp. in offering computing and other software and services over the internet. Shares of IBM slumped in pre-market U.S. trading.

“The acquisition of Red Hat is a game-changer,” Ginni Rometty, chairman and chief executive officer of International Business Machines Corp., said in a statement Sunday. “It changes everything about the cloud market.”

IBM has seen revenue decline by almost a quarter since Rometty, 61, took the CEO role in 2012. Though some of that has been from divestitures, most is from declining sales in existing hardware, software and services offerings, as the company has struggled to compete with younger technology companies. She has been trying to steer IBM toward more modern businesses, such as the cloud, artificial intelligence and security software, with inconsistent results.

IBM shares declined about 2.4% in early U.S. trading on Monday. The stock has dropped 19% this year, giving it a market value of $114 billion. Red Hat’s stock soared 51% to $176.48 per share.

In its third-quarter earnings report, IBM disappointed investors who were seeking more progress in those areas after six years of declining sales that had only recently started to show gains. Still, the improvements had been coming largely from IBM’s legacy mainframe business, rather than its so-called strategic imperatives. Cloud revenue grew 10% in the period to $4.5 billion, but that was slower than the 20% expansion in the second quarter.

The Red Hat deal could signal to investors that IBM wasn’t as well positioned in cloud as it had been claiming, said Jim Suva, an analyst at Citigroup Research.

“We expect investor skepticism around the deal given IBM’s messaging that it is well underway in its transformation,” he said.