IBM's $34 billion Red Hat acquisition came after deal talks with Microsoft, Google and Amazon, sources say

Reuters/Mike Blake

Microsoft CEO Satya Nadella and IBM CEO Ginni Rometty both took a look at Red Hat ahead of its $34 billion acquisition by IBM.

• IBM faced competition before winning its $34 billion bid to acquire Red Hat.
• Microsoft, Google and Amazon all took at look at Red Hat, according to sources familiar with the deal.
• Microsoft backed out over anti-trust concerns and Google tried to offer Red Hat a partnership instead, according to a Red Hat company filing.

When IBM announced its $34 billion acquisition of Red Hat on October 28, the tech word was struck by the huge price tag, as well as its potential to revive IBM's struggling cloud business. But it turns out, things could have gone a lot differently.

Microsoft, Google and Amazon all engaged in high-level deal discussions with Red Hat and looked closely into an acquisition in the months and weeks before Red Hat struck a deal with IBM, according to sources familiar with the deal.

As an open-source software company, Red Hat is strategic because of its popularity with developers. It's also is the largest commercial maker of the Linux operating system. IBM wanted the technology to enhance its hybrid cloud project and to give its portfolio an edge.

Red Hat indicated in a public filing on November 30 that three unnamed companies considered making bids, in addition to IBM. CNBC reported in October that Google had looked into buying Red Hat. But Microsoft and Amazon's deal talks with Red Hat have not been previously reported.

Red Hat's shareholders will vote on whether or not to approve IBM's offer on January 16. The deal would represent the biggest acquisition in IBM's 100-year-plus history and will instantly catapult IBM into the top ranks of cloud providers, a fast-growing industry that's long been the domain of Amazon and Microsoft.

Red Hat rejected IBM's first offer

The first spark of an IBM/Red Hat merger started at an April lunch between IBM CEO Ginny Rometty and Red Hat chief executive Jim Whitehurst, according to remarks Rometty made at the time of the deal.

Though IBM ultimately made a winning offer of $190 a share, it took some negotiation from Red Hat. IBM initially offered $185 a share on September 27, but Red Hat's board of directors decided it was "inadequate," according to the proxy.

Red Hat's board also asked its advisors to make a list of other potential acquirers, who Red Hat courted until moving forward on the IBM deal on October 21. On Oct. 28, the deal was announced.

Read more: We spoke with 7 insiders about IBM's $34 billion Red Hat takeover - here's how it came together

Everyone else declined to bid

Microsoft, which according to one source is referenced throughout the proxy statement as "Party A," first expressed interest in Red Hat back in March 2018. But Microsoft dropped out of the running on October 10, according to the proxy, "citing concerns about securing regulatory approvals of a strategic transaction in the US and Europe."

Microsoft did not immediately return a request for comment.

Google, which one source said was "Party B," met with Red Hat in the spring of 2018 to discuss potential partnerships. As a potential deal with IBM got closer, Google continued to move forward with the sale process, but stopped short of making an offer.

Google

Diane Greene, former cloud boss at Google, spent months looking at Red Hat.

Though Google's former cloud boss Diane Greene spent a lot of time with Red Hat ahead of its sale, she struggled to get support from the company on her large M&A aspirations, according to one source.

So on October 20, Google officially declined to submit a proposal and instead asked if Red Hat would explore a commercial partnership and a minority equity investment from Google.

Google did not immediately return a request for comment.

Amazon, which one source said was "Party C," got involved around October 12, when Red Hat's executives reached out to the company to see if they were interested in a deal, according to the proxy. But on October 20, Amazon told Red Hat that it wasn't in a position to make an offer.

Despite its participation in the process, one source said that Amazon was likely just buying time. The company wasn't interested in Red Hat, the source said, so much as it was in staying on top of what its cloud competitors at Microsoft and Google were up to.

Amazon did not immediately return a request for comment.

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