The purchase, announced on Sunday afternoon, is the latest competitive step among large business software companies to gain an edge in the fast-growing market for Internet-style cloud computing. Following the acquisition, Red Hat will continue to operate as a distinct unit in IBM's Hybrid Cloud team. Meanwhile open source big data vendors Cloudera and Hortonworks have chose to merge and earlier this year Salsforce dropped $6.5 billion on MuleSoft to power its Integration Cloud.
The move will aim to establish the hybrid cloud provider solutions that IBM believes will finally offer companies the option to securely move all business applications to the cloud.
Red Hat CEO Jim Whitehurst said IBM will give it scale while preserving an open source commitment. "IBM will become the world's #1 hybrid cloud provider", said IBM Chairman, President and CEO Ginni Rometty.
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But the combined entity will also sell software that runs on its customers own hardware and other clouds.
"The acquisition of Red Hat is a game-changer".
The $34-billion stock deal translates to $190 per Red Hat share - a 63 per cent premium to the closing price Friday for the Raleigh, North Carolina company.
Red Hat has been investing heavily in tech tools such as so-called "containers", which make it easier for businesses to split up their computing work among a mix of data centers.
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Venero's message for IBM CEO Rometty: "The simple message for Ginni Rometty is, 'Don't forget the channel partners who helped bring Red Hat to the level that it is today in enterprise accounts'".
"Google, Amazon, and Microsoft (and potentially Oracle) have the strategic motivations and financial resources to consummate such a transaction and would not be surprised if we were to see one of them make a competing bid", analysts from Stifel said in a note. Those projects included developing Linux for the enterprise and more recently, on hybrid cloud infrastructure. Earlier this year, chairman Ginni Rometty claimed the 107-year-old U.S. company's reinvention - from a legacy computer maker into a cloud computing and artificial intelligence technology company - was now "largely complete". The deal has been put up for approval by the board and shareholders of Red Hat. Red Hat, on the other hand, could not monetise its own product suite effectively, and annual revenue remained around $3 billion.
The deal comes just two weeks after IBM reported that its sales for its quarter ended September 30 came in at $18.8 billion, down two percent from year ago period, but flat when adjusted for currency fluctuations.
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The deal is expected to officially close sometime in 2019.