IBM (IBM) is an information technology company which provides integrated solutions that leverage information technology and knowledge of business processes; the company was founded in 1911.

On October 16, 2018, IBM reported third-quarter earnings results. Revenue of $18.68 billion declined 2% year-over-year, but was flat in constant currency. Revenue missed analyst estimates by $330 million. Adjusted earnings-per-share of $3.42 beat analyst expectations by $0.02 per share, and increased 5.0% from the same quarter a year ago.

On October 29, 2018, IBM announced it will acquire Red Hat, Inc. (RHT) for $190 per share, representing a total enterprise value of $34 billion. This is the largest deal in IBM’s history, and is among the largest deals ever in the technology sector.

Red Hat operates in the open-source software market and primarily distributes technology products used in data centers. It generates annual revenue of nearly $3 billion. It will boost IBM’s cloud platform, which is one of its most important strategic growth areas. IBM states that the acquisition will be accretive to earnings within 12 months of closing.

IBM’s turnaround will receive a boost from the Red Hat acquisition. As shown in the above table, IBM’s earnings growth plateaued in 2014, with a steady decline since.

The Red Hat acquisition will significantly restore IBM’s growth as it gives the company further expansion into key strategic initiatives such as the cloud, open source, and analytics. IBM has had to play catch up to other tech giants like Microsoft and Amazon, which have a lead in cloud infrastructure.

Collectively, IBM refers to its group of growth initiatives as the “strategic imperatives”, which continue to perform well. In the past 12 months, total strategic revenue increased 11% to $39.5 billion. Total cloud revenue increased 20% to $19 billion in the past four reported quarters.

As the strategic imperatives become a larger part of the overall organization, IBM should return to earnings growth in the years ahead.