IBM has announced that it has agreed to purchase US cloud software company Red Hat for $34bn (£26.5bn) in its largest ever acquisition. The deal is aimed at diversifying IBMs technology hardware and consulting business into higher-margin products and services, in particular subscription-based offerings.

Founded in 1993, Red Hat specialises in Linux operating systems, built on open-source software, and IBM has said it remains committed to the firms open governance, open source contributions and overall participation in the open source community. Red Hats business model sees it charge fees to its corporate customers for custom features, maintenance and technical support, and it is one of very few companies in the cloud computing sector that has seen both revenue growth and free cash flow.

“The acquisition of Red Hat is a game-changer,” said Ginni Rometty, CEO, chairwoman and president of IBM. “It changes everything about the cloud market. IBM will become the worlds number one hybrid cloud provider, offering companies the only open source solution that will unlock the full value of the cloud for their businesses.

“Most companies today are only 20 per cent along their cloud journey, renting compute power to cut costs. The next 80 per cent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to hybrid cloud, extracting more data and optimising every part of the business, from supply chains to sales.”

The acquisition saw IBM purchase Red Hat at a price of $190 per share in cash, a 60 per cent premium on Red Hats closing stock price of $116.68. JPMorgan advised IBM on the deal, and provided most of the financing, with Guggenheim Partners representing Red Hat.

IBM and Red Hat will continue to build and enhance Red Hat partnerships, including those with major cloud providers such as Amazon Web Services, Microsoft Azure, Google Cloud, Alibaba and more. Red Hat will become part of IBMs Hybrid Cloud team as a distinct unit, and will continue to be led by CEO Jim Whitehurst and its current management team.

“Joining forces with IBM will provide us with a greater level of scale, resources and capabilities to accelerate the impact of open source as the basis for digital transformation and bring Red Hat to an even wider audience – all while preserving our unique culture and unwavering commitment to open source innovation,” said Whitehurst.