IBM shares fell 4% as investors reacted to Big Blue’s $34 billion proposed purchase of software firm Red Hat. The companies, which announced the acquisition Sunday, made it clear the deal was all about helping IBM become stronger in the cloud, a market in which it has struggled relative to its primary competitors, Amazon, Microsoft and Google. But investors worried IBM was paying too much. Red Hat was trading around $116 a share last week—well below the $190 that IBM is offering. (Red Hat shares closed up 45% to $169.63 on Monday).
Red Hat is a big distributor of the open source Linux operating system, which also happens to be the favored operating system powering computers inside most cloud computing data centers. IBM has struggled to keep up with the big cloud computing providers, losing the fourth spot in the global market to Alibaba during the first quarter of the year, as The Information reported last month. The Red Hat acquisition seems to be aimed at a segment of the market called the hybrid cloud, in which big businesses use some online services in the big public data centers while also operating their own private data centers because of data privacy, regulatory and other concerns.
But precisely what benefits IBM’s business will get remains one of the questions. The companies already worked together in the cloud market. IBM is hoping to get access to a base of open-source developers that work with Red Hat. In that way, the deal is similar to Microsoft’s purchase of GitHub. But both deals carry the risk that the developers shun the acquirers and gravitate to new platforms.