Red Hat soars on news of IBM deal, and so do the wallets of many executives

Shares of Raleigh-based software maker Red Hat soared on Monday, while those of IBM, the company’s future owner, sank.

Red Hat’s share prices rose 45.4 percent to $169.63 per share by the end of trading on Monday, a day after news came that IBM agreed to buy the company for $190 per share. IBM, which has a large presence in Research Triangle Park, on the other hand, saw its share price drop 4.1 percent to $119.64 per share at the end of trading.

IBM said Sunday that it would buy the software maker for $34 billion, which would make Red Hat the biggest acquisition that IBM has made in its 107-year history and the world’s second-largest technology deal ever, according to Bloomberg. The deal is expected to close in the latter half of 2019, IBM said.

“The acquisition of Red Hat is a game-changer,” IBM CEO Ginni Rometty said in the press release announcing the deal. “It changes everything about the cloud market. IBM will become the world’s No. 1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”

In a conference call with investors Monday morning, Rometty said the deal was about resetting the cloud software landscape, in which IBM is currently competing with younger tech giants, such as Microsoft, Google and Amazon. The hybrid cloud — when companies use a mix of on-site, private and third-party public cloud services, such as Amazon’s AWS and Microsoft’s Azure — is an emerging $1 trillion opportunity that the companies want to be prepared for, Rometty said, according to the Associated Press.

Conversations between Red Hat and IBM about the acquisition began in April, both Rometty and Whitehurst said on financial television shows on Monday.

Rometty said on Bloomberg TV that the deal won’t cause layoffs at either company, and reiterated the fact that the company will operate as an independent unit of the IBM. For his part, Jim Whitehurst, Red Hat’s CEO said he had no plans on leaving the future combined company.

“I am in this in for the long run,” Whitehurst said in an interview on CNBC. “I am young. I plan to be here for the rest of my career.”

Whitehurst also noted in the CNBC interview that there were certain financial safeguards to encourage the company’s workforce to stay at the company. “My team is really jazzed about what we can do with IBM,” he added.

Red Hat has more than 2,000 employees at its headquarters tower in downtown Raleigh, making it one of the city’s largest employers. The company has been downtown since 2013, when it moved its headquarters from N.C. State University’s Centennial Campus to the tower in 2013, bringing around 600 employees at the time. Worldwide, the company had approximately 12,600 employees as of August 2018.

Rometty was in Raleigh on Monday to address Red Hat’s Raleigh employees. Streams of employees wearing Red Hat’s iconic fedora symbol could be seen in downtown Raleigh on Monday morning heading to the Duke Energy Center for the Performing Arts to hear from executives.

Many employees expressed reserved optimism about the deal afterward. “I am cautiously optimistic,” said Jim Preis of Red Hat. “I believe what Ginny and Jim had to tell us. We’ve got a lot to work to do now, so let’s do this.”

The $190 a share price that IBM said it would pay for Red Hat was equal to a 63 percent premium over the Raleigh company’s closing share price on Friday of $116.68 per share. Rometty said in the CNBC interview that the premium was a “fair price if people understood the prized asset we are buying,” which has both “high growth and high profit.”

That 63 percent premium will also mean that many employees will have a large financial benefit from the sale.

Though, many executives at Red Hat sold shares of the company in October, the high share price that IBM has offered to pay will likely add millions of dollars to many of their bank accounts.

According to a recent filing with the Securities and Exchange Commission, for example, CEO Jim Whitehurst owns directly owns 359,114 shares, which would equal around $68.2 million at IBM’s valuation. Whitehurst had recently sold $709,000 worth of stock in the company earlier this month.

Other winners, and executives that sold stock in October, include:

▪ Paul Cormier, Red Hat’s vice president of products & technologies, who still owns 36,640 shares as of Oct. 16. Cormier also indirectly owns 158,971 shares in a grantor retained annuity trust, putting his total holdings at a value of $30.2 million.

▪ Alexandra DeLisa, Red Hat’s chief people officer, owns 32,257 shares, as of Oct. 17, an amount worth $6.1 million at IBM’s valuation.

▪ Michael Cunningham, Red Hat’s general counsel, owns 50,638 shares, which would equal $9.6 million at IBM’s valuation.

▪ Arun Oberoi, Red Hat’s vice president of global sales, owns 117,104 shares, which would equal $22.2 million at IBM’s shares.

▪ Eric Shander, Red Hat’s chief financial officer, owns 18,626 shares, which would amount to $3.5M at IBM’s valuation.

▪ William S. Kaiser, a company director owned 68,842 shares as of May 31, which would amount to $13.1 million at IBM’s valuation.

▪ Narendra K. Gupta, Red Hat’s board chair owned 51,919 shares as of May 31, which would amount to $9.9 million at IBM’s valuation.

▪ W. Steve Albrecht, a company director owned 29,326 shares as of May 31, which would amount to $5.6 million at IBM’s valuation.

▪ Donald H. Livingstone, a company director, owned 31,238 shares as of May 31, which would amount to $5.9 million at IBM’s valuation.

▪ Sohaib Abbasi, a company director, owned 37,649 shares as of May 31, which would amount to $7.2 million at IBM’s valuation.

Bridget Harrington, executive director of Innovate Raleigh, called the IBM deal a phenomenal outcome for the local investment ecosystem.

“This definitely turns up the dial for the investment community,” Harrington told The News & Observer on Sunday. “We now have more folks with more money (in their pockets) to reinvest in the community. It is up to those folks to keep that money in the community and make more bets in Raleigh.”

This story was originally published October 29, 2018 at 2:03 PM.