Doing nothing would be more risky.The original major technology company, International Business Machines, makes its largest acquisition of more than…
Doing nothing would be more risky.
The original major technology company, International Business Machines, makes its largest acquisition of more than a century’s existence with its $ 33 billion acquisition of Red Hat.
The all-cash deal, announced on Sunday, represents approximately 29% of IBM’s total market capitalization compared to last week’s closing price and is more than twice as much as the company’s latest reported $ 1
4.7 billion cash box.  As such, the deal will significantly increase IBM’s debt burden and probably lower the credit rating, which increases its borrowing costs. Toni Sacconaghi of Bernstein estimates that IBM’s annual interest expense will increase an additional $ 1 billion a year.
An expensive move, in other words, and not one that will immediately become “transformations” in the business process. Red Hat’s forecast of $ 3.4 billion in revenue for its current fiscal year would increase about 4% to IBM’s total.
Red Hat has said that a relatively high margin software store for IBM’s stable offerings. More importantly, Red Hat gives IBM a significant step in the business of selling hybrid cloud services to corporate customers. Such services mean that companies use a mix of public cloud services like Amazon Web Services along with their own private clouds. About 85% of all companies are expected to adopt a hybrid cloud thinking, according to a forecast from Jefferies & Co.
Red Hat is a major venture from IBM in the right direction. However, much will depend on integration, as Red Hat also makes significant business with IBM’s competitors.
IBM says that Red Hat will be run “as a distinct device” with current CEO Jim Whitehurst, who reports directly to IBM’s CEO Ginni Rometty, while retaining his current headquarters and practices. It is worth noting that VMware has already shown that such a model can work. The company has managed to maintain its independence under the ownership of EMC and now Dell.
IBM has still never managed a deal of this size and, with more than nine times Red Hat’s resale, the bid on Red Hat makes a great prize even in the precious cloud sphere.
But IBM needed to do something else. Sales achieved in 2011 while free cash flow peaked a year later. IBM’s shares have drawn Nasdaq for the better part of five years. Shrinking tech giants have limited appeal, even for value investors.
Buying Red Hat will give Big Blues clouds a much needed elevator.