IBM to Buy Red Hat, the Top Linux Distributor, for $34 Billion

IBM is making a big move to bring more software developers under its wing by acquiring Red Hat, the largest distributor of the popular open-source operating system Linux, for $34 billion.

The purchase, announced on Sunday afternoon, is the latest competitive step among large business-software companies seeking an edge in the fast-growing market for cloud computing.

In June, Microsoft acquired GitHub, a major code-sharing platform for software developers, for $7.5 billion.

With the deal for Red Hat, IBM is trying to position itself as a kind of corporate “Switzerland” in cloud computing — a trusted partner of businesses that are moving to the cloud, but are leery of becoming dependent on one major cloud supplier.

In the cloud model, software developers write applications that run on remote data centers. The advantage can be lower costs and faster development of new business software.

IBM is a champion of a hybrid approach to cloud computing. That means some crucial data and applications run on cloud technology inside a company’s data centers, while other computing tasks run on the clouds of tech companies.

The major third-party cloud platforms are Amazon, Microsoft and Google. Businesses complain that these cloud suppliers include proprietary technology that makes it difficult to switch from one cloud to another.

The IBM cloud strategy is to supply both hardware and software for companies to build their own private clouds, and it also has a third-party public cloud offering.

IBM, analysts say, cannot really compete broadly with so-called hyperscale cloud companies — Amazon, Microsoft and Google — which tap their deep coffers to spend many billions of dollars a year to build more giant data centers.

But IBM and Red Hat say they are well placed to be leaders in helping corporations make the transition to cloud computing without getting locked into the technology of an internet giant.

The two companies say they plan to offer the technology to link a company’s in-house cloud and multiple third-party clouds.

“Enterprises are moving to the cloud but 80 percent of them are not there yet,” said Arvind Krishna, an IBM senior vice president in charge of its hybrid cloud offerings. “We can provide a much easier path to manage and make secure both private clouds and links to multiple public clouds.”

Red Hat, founded in 1993 and based in Raleigh, N.C., has built a profitable business, with $2.4 billion in revenue last year, around open-source software, mainly Linux. Open-source code is distributed free, and can be modified by far-flung programmers, under certain rules.

Red Hat has expanded — and made money — by offering technical support, quality control, software tools and a forum for collaboration, charging subscription fees.

Linux is the preferred operating system for cloud computing. “For most corporations, hybrid cloud is the only practical way to the cloud,” said Paul Cormier, president for products and technologies at Red Hat.

The link with IBM, Mr. Cormier said, will accelerate Red Hat’s progress in the market for corporate cloud migrations.

Red Hat will join IBM’s cloud team, the companies said in a joint statement, but as a “distinct unit” to preserve its independence and neutrality in open-source development.

IBM’s offer of $190 a share in cash is more than a 60 percent premium over Red Hat’s closing price on Friday, $116.68 a share.

The hefty price tag, said one person close to the deal, who asked not be to identified because he was not authorized to speak publicly, is justified by Red Hat’s growth and strong cash flow.

IBM, he said, is paying about 30 times Red Hat’s free cash flow, well below the average for recent software company acquisitions, and it will help lift IBM’s growth and cash flow.

The boards of both companies approved the deal, and the sale is expected to close in the second half of next year. Goldman Sachs, JPMorgan Chase and Lazard advised IBM on the deal, and Guggenheim Partners and Morgan Stanley advised Red Hat.