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Why Red Hat's Stock Rose 46.2% in 2018

By Anders Bylund – Updated Apr 18, 2019 at 5:03PM

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Big Blue is buying Red Hat to create a large, purple Linux fedora.

What happened

Shares of open-source software vendor Red Hat (RHT) gained 46.2% in 2018, according to data from S&P Global Market Intelligence. The maker of the Red Hat Enterprise Linux operating system, the JBoss Java environment, and the OpenShift software container technology posted modest second-quarter guidance over the summer, sending share prices drastically lower. All of that was forgiven in October when IBM (IBM 0.73%) announced a $34 billion buyout offer. Red Hat shares immediately shot 50% higher and have been trading at roughly that level ever since.

Two puzzle pieces, each made up of several dozen people, aligning to connect on a white floor.

Image source: Getty Images.

So what

IBM is picking up Red Hat in order to bolster its existing portfolio of hybrid cloud technologies. The companies have been working together for ages and ages, but the buyout formalizes the partnership between these two software giants.

Now what

All that being said, Red Hat's shares still trade at 8% below IBM's all-cash buyout price. The deal is still in need of regulatory and shareholder approvals, including a yea-or-nay vote from Red Hat's owners on Jan. 16. Nobody expects the merger to fall apart due to a lack of shareholder support or negative regulatory reviews, but you never know until the final John Hancock is in place. That leaves some room for arbitrage opportunities, but it's up to you to decide whether a prospective 8% return is worth keeping your cash out of other opportunities for the next six months or so -- the companies expect to finalize the merger in the second half of 2019.

Check out the latest Red Hat and IBM earnings call transcripts.

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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