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Why Red Hat Inc. Shares Jumped 26% Higher Last Month

By Anders Bylund – Nov 8, 2018 at 11:45AM

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The Linux vendor and general open-source software champion is joining forces with Big Blue in a $34 billion blockbuster of a buyout.

What happened

Shares of open-source software developer Red Hat (RHT) rose 25.9% in October of 2018, according to data from S&P Global Market Intelligence. No mystery here: The stock jumped when IT giant IBM (IBM -0.22%) announced that it will acquire Red Hat in a $34 billion deal.

So what

Red Hat's share prices had been trending downward for most of October, dipping as much as 14% below September's final quote, when Big Blue stepped in. The all-cash offer is worth $190 per share, expected to close in the second half of next year, and still requires shareholder approval as well as a few regulatory sign-offs. The stock soared as much as 60% higher the next day. IBM's shares fell 3% on the news.

Three red fedoras hanging on a white wall at Red Hat's headquarters in Raleigh, North Carolina.

Image source: Red Hat.

Now what

The immediate market reactions added $9 billion to Red Hat's market value while shaving $3.4 billion off of IBM's, which works out to something like $5.5 billion of net value added that day.

IBM wants Red Hat for its prowess in cloud-computing solutions. In particular, the company hopes to build a market-leading presence in the hybrid cloud segment, where customers mix and match off-site cloud servers with cloud hosts under lock and key in their own data centers. The companies claim that a mere 20% of the global business workloads that could and should move to the cloud have made the transition so far, leaving lots of room for further growth. Staking a strong claim to that market in these formative years could pay off big for IBM in a few years, and that's what the Red Hat deal is all about.

As for us Red Hat investors, the stock still trades 9% below the proposed buyout price.

Anders Bylund owns shares of IBM and Red Hat. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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