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IBM Slides to 9-year low after $ 34 billion Red Hat Deal; Moody's warns of ratings

IBM shares were lowered to the lowest level of nine years on Monday after the group said it would pay…

IBM shares were lowered to the lowest level of nine years on Monday after the group said it would pay equivalent to almost one third of its Red Hat (RHT) market value in a $ 34 billion bouncy jump starting at $ 1 billion cloud computing market but raises questions over the price it is ready to pay for the Linux distributor.

The share was also pressed by a decision by Moody’s Investors Service to review IBM’s A1 credit rating for a possible downgrade, referring to a “substantial leverage effect” … and a “deviation from IBMs historical acquisition philosophy of making small purchasing opportunities that limit integration risk. “

IBM pays $ 1

90 for all outstanding shares in Raleigh, North Carolina-based Red Hat, a 63% premium at its closing closing price of $ 116.68 and will fund the $ 34 billion dollar value, which CEO Ginni Rometty called a “game changer” with a blend of cash and debt. Red Hat will act as a distinctive entity within IBM’s hybrid cloud division, says the company and will be run by current boss Jim Whitehurst.

“We believe that Red Hat is a trusted open source leader with a large corporate customer and share gainer in its traditional categories (server operating system, application server markets, middleware) while participating in very strong secular trends such as data architecture overarching, cloud computing, virtualization and large data, “analysts wrote at Oppenheimer. “We question IBM’s ability to extract extra value from Red Hat, given its M & A record and mixed stature in the development community.”

IBM shares were marked at around 3% lower in Monday’s marketing market, indicating an opening $ 121,291 opening price, of which the lowest since November 2009 and a move that would extend its last decline to 21% and value Armonk, New York- based group of almost $ 110 billion. Red Hat’s market share, based on IBM’s $ 190 per share bid, is $ 33 billion and its shares marked 51% higher to $ 176.50, which indicates that investors price certain execution risks in an agreement that must still be approved by shareholders. 19659002] Rometty told CNBC Monday that its $ 190 offer was a “fair price” for Red Hat and repeated her view that she could both integrate the company, generate revenues and continue to grow IBM’s dividend even though $ 33 billion will be for Raleigh , North Carolina-based group.

The business is expected to be free cash flow and gross margins within 12 months, says IBM, and will accelerate sales growth and support a solid and growing dividend. The group, however, stated that it will cancel the planned repurchase of shares by 2020 and 2021 due to the acquisition. IBM said it is still “committed to maintaining strong credit ratings” and will focus on a lever profile that is consistent with “a middle to high lone A” grade.

Earlier this month, IBM showed weaker than expected revenues from the third quarter as cloud data supply slowed and a stronger US dollar weighed on international sales, complicating Romani’s uneven turnaround plans.

IBM said sales for the three months ending in September decreased 2.1% from the same period last year to $ 18.8 billion, as the Street Cloud forecasts amounted to $ 19.1 billion as cloud sales increased to about half of the previous quarter.

Earnings were solid at $ 3.42 per share, but slowed sales in IBM’s system department, where revenue declined sharply from the previous quarter and cognitive software sales – including the Watson brand – dropped 6% to $ 4.15 billion. Turnover revenue for Technology Services & Cloud Platforms fell by 2% to $ 8.3 billion.

IBM’s gross margin for the quarter in September was 49.5%, essentially flat on a yearly basis and the best figure the group published in three years, according to CFO Jim Kavanaugh, and held its annual GAAP result guidance of $ 13.80 per share of free cash flow of approximately $ 12 billion.

The Linux operating system distributor recently sent a weaker than expected profit for its financial second quarter, ending in August, and sales for the three months ending in November were likely to come under forecasts with a range of $ 848 million to $ 856 million .

However, CEO Whitehurst insisted on an interview with TheStreet, and in the company’s income is called that some one-off events should blame and that his company’s competitiveness has not changed.

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