Categories: world

IBM's $ 33B Red Hat Deal Fails 3 of 4 Tests for Successful Acquisitions

<div _ngcontent-c14 = "" innerhtml = " KIEV, UKRAINE – 2018/10/25: Red Hat Software Company logo is viewed on smart…


<div _ngcontent-c14 = “” innerhtml = “

KIEV, UKRAINE – 2018/10/25: Red Hat Software Company logo is viewed on smart phone. Red Hat, Inc. is a United States multinational software company providing software for open source to the corporate community. (Photo by Igor Golovniov / SOPA Images / LightRocket via Getty Images)

IBM shrinks revenue fell 2.1

% in the last quarter – and its inventory is down 35% since its current CEO took over in early 2012.

So what better time to make the biggest acquisition in its history? That’s what IBM’s 29th deal is to pay $ 33 billion on October 26th – to acquire open source software manufacturer Red Hat according to [19659004] CNBC .

Red Hat provides services for its version of the open source (free of licensing fees) Linux operating system, middleware, storage, virtualization and management tools. Isar revenue t through two categories: subscriptions and education and services. North America contributed approximately 64% of total revenue in budget 2018; Europe, the Middle East and Africa contributed 23 percent and the Asia-Pacific contributed 14% according to Morningsta

Red Hat is a steadily growing and profitable company that wastes a lot of money. Over the last five years, sales have increased by 17.1% annual interest rate to $ 2.92 billion, net profit rose with an annual interest rate of 11.5% to $ 259 million and free cash flow grew to almost 19% annually to 821 million USD, according to Morningstar.

Unfortunately, Red Hat released its last quarter. That was when the missed analysts expected their sales and its forecast for the current quarter also became short – investors may have been concerned that & nbsp; Red Hat lost offers to rivals and that growth could slow down, according to Bloomberg who noted that Red Hat shares have fallen by 28% in the last six months through October 26.

Is this deal a good thing for IBM shareholders? Investors do not love this store – send their shares down by 4% on 29 October. And I think that three of the four tests for successful acquisitions fail. (I have no financial interest in the securities mentioned in this post.)

To be & nbsp; Fair, & Redbats, Red Hat competes in an attractive industry. However, the combined companies will not be better, IBM & nbsp; grossly overpaid, and it will be difficult to integrate the two companies.

Industry Attention: Pass

Red Hats industry – providing services and training for companies using open source applications – is big, growing and profitable. As Red Hat CEO Jim Whitehurst said in a SEC filing & nbsp; “We believe our total addressable market is $ 73 billion by 2021. If software eats the world – and digital” [19659000] IDC reported it with 32.7% of the server’s operating system market 2017 – Red Hat was missing only Microsoft. In the Linux segment, IDC found that the adoption of Red Hat Enterprise Linux increased by almost 20% in 2017.

Better of: Failure

First of all, IBM and Red Hat spoke the deal as a way of competing with Amazon and Microsoft in the so-called hybrid molecule. However, IBM’s approach to integrating acquisitions makes it highly unlikely that the combined companies will be able to cooperate to provide customers with better service and gain market share.

IBM is first known for its acquisitions to introduce internal requirements to its products – the products must be shown to everyone working together to force customers to accept a clumsy package rather than a more focused and effective solution.

While IBM has delivered Red Hat Servers for several years – and this deal will save IBM from paying Red Hat because it remains to be seen how well this deal will result in a cloud service that can increase IBM’s moody 1.9% share of cloud infrastructure revenue in 2017 [19659000].

What’s more, Companies have purchased Red Hat products because it was considered supplier-neutral. Whitehurst told CNBC that the combined company & nbsp; would be the biggest contributor to open source software. “We will [also] remain distinct because we want our customers to understand that Red Hat is coming in is a neutral sale.”

However, as part of IBM, Whitehurst will have an insurmountable challenge to explain how Red Hat can Be both neutral and try not to make the acquisition profitable by encouraging customers to buy from IBM. This will be particularly difficult as he loses control of his product line and marketing strategy because of Big Blues bureaucracy.

Net Current Value Greater Than Error: Error

By paying so much for Red Hat, it will take some heroic assumptions for this store to create a positive present value. IBM has approximately $ 80 billion in annual sales and Red Hat would only increase 3.8% to Big Blues’ top line.

This is not so much but it can get worse. It is assumed, however, that customers adhere to Red Hat when owned by IBM. Of course, companies previously purchased from Red Hat because it was perceived as neutral may decide that & nbsp; switch to an independent rival.

In addition, Red Hat would only add 6% to IBM’s free cash flow. Certainly, there is no doubt that it is possible to make assumptions that would result in this 63% premium resulting in a positive present value. But I think IBM is overpaid.

Integration: fail

One of the main reasons why mergers fail is that the acquired company can not keep the best people in the acquired company. One factor that causes people to leave is a change in their culture. And Red Hat believes that the preservation of its culture is crucial to its success. According to its latest annual report

We believe that a critical contributor to our success has been our corporate culture, which we believe promotes innovation, creativity and cooperation. As our organization grows, our employees (including remote workers) and our resources are spread more globally and our organizational structures become more complex, we can make it increasingly difficult to maintain these beneficial aspects of our company’s culture. If we can not maintain our corporate culture, it can be difficult to attract and retain motivated employees, continue to perform at the current level or implement our business strategy. Consequently, our business, finances, operating income and cash flow can be adversely affected . & Nbsp;

Will this culture survive as acquired by IBM? Considering the difference between IBM’s actual culture and one built by Thomas Watson I would vote no. But Rometty told Wall Street Journal that IBM & nbsp; Intends to maintain Red Hat’s culture and brand.

To be fair, this is an outstanding deal for Red Hat shareholders who will undoubtedly enjoy the huge premium IBM paid. Unfortunately, IBM’s shareholders are likely to be disappointed by the failure of the agreement to send the four tests for successful acquisitions.

“>

KIEV, UKRAINE – 2018/10/25: Red Hat Software Company logo displayed on smartphone Red Hat, Inc. is a United States multinational software company providing open source software to the corporate community. (Photo by Igor Golovniov / SOPA Images / LightRocket via Getty Images)

IBM shrinks revenue fell 2.1% in the last quarter – and the share decreases by 35% since its current CEO took over in early 2012.

So what better time to make the biggest acquisition in its history? That’s what IBM’s October 29 deal is to pay $ 33 billion – a 63% premium over its end on October 26 – to acquire Open Source software manufacturer Red Hat according to CNBC .

Red Hat provides services for its version of open source (free of licensing fees) Linux operating system s, middleware, storage, virtualization and management tools. The company redovi saves revenue through two categories: subscriptions, education and services. North America contributed approximately 64% of total revenue in budget 2018; Europe, the Middle East and Africa contributed 23 percent and the Asia-Pacific contributed 14 percent according to Morningstar.

Red Hat is a steadily growing and profitable company that wastes a lot of money. Over the past five years, sales have increased by 17.1% annual interest rate to $ 2.92 billion, net revenue rose with an annual interest rate of 11.5% to $ 259 million and free cash flow increased to almost 19% annually to 821 million dollar, according to morningstar.

Unfortunately, Red Hat released its last quarter. That’s when the missed analysts expected sales and its forecast for the current quarter also fell short. Investors may have been worried that Red Hat lost contracts to competitors and that growth could slow down, according to Bloomberg, who noted that Red Hat shares are down 28% percent in the last six months through October 26th.

Is this deal a good thing for IBM’s shareholders? Investors do not love this store – send their shares down by 4% on 29 October. And I think that three of the four tests for successful acquisitions fail. (I have no financial interest in the securities mentioned in this post.)

To be fair, Red Hat competes in an attractive industry. However, the combined companies will not be better, IBM is very overpaid, and it will be difficult to integrate the two companies.

Industry Attention: Pass

Red Hats industry – providing services and training for companies using open source software – is big, growing and profitable. As Red Hat CEO Jim Whitehurst said in a SEC filing: “We believe our total addressable market amounts to $ 73 billion by 2021. If software eats the world – and with digital transformation that happens across industries, it’s really – open source code is the most important ingredient. “

In addition, IDC reported it with 32.7% of the server’s operating system market in 2017 – Red Hat just beat Microsoft. In the Linux segment, IDC found that the adoption of Red Hat Enterprise Linux increased by almost 20% in 2017.

Better of: Failure

Certainly, IBM and Red Hat were discouraged as a way of competing with Amazon and Microsoft in the so-called hybrid clouds. However, IBM’s approach to integrating acquisitions makes it highly unlikely that the combined companies will be able to cooperate to provide customers with better service and gain market share.

IBM is first known for its acquisitions to introduce internal requirements to its products – the products must be shown to everyone working together to force customers to accept a clumsy package rather than a more focused and effective solution.

While IBM has delivered Red Hat Servers for several years – and this deal will save IBM from paying Red Hat because it remains to be seen how well this deal will result in a cloud service that can boost IBM’s soft 1 , 9 percent of cloud infrastructure revenue in 2017.

In addition, companies have purchased Red Hat products because it was considered supplier-neutral. Whitehurst told CNBC that the combined company would be the biggest contributor to open source software. “We will [also] remain distinct because we want our customers to understand that Red Hat is coming in is a neutral sale.”

However, as part of IBM, Whitehurst will have an insurmountable challenge to try to explain how Red Hat can be both neutral and not try to make the acquisition profitable by encouraging customers to buy from IBM. This will be particularly difficult as he loses control of his product line and marketing strategy because of Big Blues bureaucracy.

Current Value Greater Than Error: Error

By paying so much for Red Hat, it will take some heroic assumptions for the business to create a positive present value. IBM has approximately $ 80 billion in annual sales and Red Hat would only increase 3.8% to Big Blues’ top line.

This is not so much but it can get worse. It is assumed, however, that customers adhere to Red Hat when owned by IBM. Of course, companies that previously purchased from Red Hat, as perceived as neutral, can decide to switch to an independent rival.

In addition, Red Hat would only add 6% to IBM’s free cash flow. Certainly, there is no doubt that it is possible to make assumptions that would result in this 63% premium resulting in a positive present value. But I think IBM is overpaid.

Integration: fail

One of the main reasons why mergers fail is that the acquired company can not keep the best people in the acquired company. One factor that causes people to leave is a change in their culture. And Red Hat believes that the preservation of its culture is crucial to its success. According to its latest annual report,

we consider that a critical contributor to our success has been our corporate culture, which we believe promotes innovation, creativity and cooperation. As our organization grows, our employees (including remote workers) and our resources are spread more globally and our organizational structures become more complex, we can make it increasingly difficult to maintain these beneficial aspects of our company’s culture. If we can not maintain our corporate culture, it can be difficult to attract and retain motivated employees, continue to perform at the current level or implement our business strategy. As a result, our business, finances, operating income and cash flow can be adversely affected .

Will this culture be acquired by IBM? Given the difference between IBM’s actual culture and the one built by Thomas Watson, I would vote no. But Rometty told Wall Street Journal that IBM intends to keep Red Hat’s culture and brand.

To be fair, this is an outstanding deal for Red Hat shareholders who will undoubtedly enjoy the huge premium that IBM has paid. Unfortunately, IBM shareholders are likely to be disappointed by the failure of the agreement to send the four tests for successful acquisitions.

Share
Published by
Faela