IBM CEO: Red Hat deal is a 'game-changer' that will grow cash flow and gross margins in first year

  • CNBC's Jim Cramer sits down with the CEOs of IBM and Red Hat after a blockbuster deal between the two cloud companies.
  • The $34 billion deal will be "accretive year one" on several metrics and is a "game-changer" for IBM, CEO Ginni Rometty tells the "Mad Money" host.

IBM's roughly $34 billion deal to buy open-source software provider Red Hat — the third-largest technology deal in U.S. history — will create enormous value for Big Blue, IBM Chairman, President and CEO Ginni Rometty told CNBC on Monday.

In a joint interview with Red Hat President and CEO Jim Whitehurst, whose company works with enterprises to develop cloud-based applications and solutions, Rometty said the deal isn't just about the 4 percent revenue boost Red Hat's business provides.

It will also start boosting free cash flow and gross margins in "year one," she told "Mad Money" host Jim Cramer. "This is about lifting all of IBM, which is why we're so bullish about saying this absolutely accelerates our high-value model."

Rometty also insisted that IBM's dividend "is more than safe" and will continue to grow thanks to the company's prudence and "financial flexibility." She pointed to the $15 billion in cash and $12 billion in free cash flow IBM was left with after its most recent quarter, saying it would be "plenty" for maintaining IBM's dividend and continuing to spur growth.

For Red Hat, the takeover will bring enormous scale, accelerated growth and opportunities for the company's employees to grow their career paths, among other benefits, Whitehurst said in the interview.

"And, as we say, we're very passionate about open source. If there's any way to make sure open source is the dominant platform going forward, this will allow open source to do that," said Red Hat chief, who plans to stay with the combined company.

The deal will also make IBM "No. 1 in hybrid cloud," Rometty said. The legacy computer giant has struggled in recent years as it launched a strategic move into modern technologies like artificial intelligence and the cloud.

"This is going to be a critical part of IBM's future," she said, adding that Red Hat's technology is "mission-critical" for companies shifting operations to the cloud and represents a "$1 trillion marketplace."

"It is a game-changer to IBM and we know it's the right thing," Rometty said. "I think of it as the most important thing for our customers and for our business or I wouldn't have done it."

The Red Hat takeover marks IBM's biggest deal ever. IBM will pay cash for all of Red Hat's stock at $190 per share. IBM's stock closed 4.13 percent lower on Monday after hitting a new 52-week low. Shares of Red Hat surged 45.38 percent to $169.63 a share.

Watch Ginni Rometty and Jim Whitehurst's interview here:

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