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IBM Acquires Red Hat
martinwolf Transaction Analysis
- Enterprise Value $34 billion
- EV/LTM Revenue 10.2x
- EV/LTM EBITDA 53.4x
In a surprise development yesterday, IBM (NYSE:IBM) and Red Hat (NYSE:RHT) announced that the two companies had reached a definitive agreement for IBM to acquire Red Hat for $190.00 per share in cash, a premium of 63% above Red Hat’s closing share price on Friday.
This deal represents IBM’s largest acquisition ever, and will be funded through a mixture of cash and debt. As of the end of the third quarter, IBM had $14.7 billion in cash.
The acquisition is expected to close in the second half of 2019 and has been approved by the boards of both companies. It is expected to boost IBM’s free cash flow, gross margin and revenue growth within one year.
- Buying Back Into the Game: Cloud is a key priority for IBM as the company continues to try and shake off its 107-year history. But competitors Amazon, Microsoft and Google have captured large swaths of the market with their own proprietary cloud solutions, leaving IBM with only 1.9% of cloud infrastructure market revenue. This acquisition doubles down on IBM’s “third way” philosophy–providing tools for companies to establish hybrid and private clouds without getting locked in to their peers’ ecosystems.
Seeking a Differentiator: Red Hat’s business is primarily built on open-source software, largely Linux. This makes it a natural fit for enterprise software developers looking to create applications that run on cloud computing platforms of all types–and opens up new cross-selling opportunities across IBM’s broad database of corporate customers.
Big Deal: This deal is IBM’s largest ever and represents the third-biggest deal in the history of US technology firms (after Dell-EMC in 2016 and JDS Uniphase’s acquisition of optical component supplier SDL in 2000). The $190 share price represents a premium of 63% above the company’s closing price on Friday, though Red Hat shares traded above $175 in June before disappointing second quarter guidance. The total value is approximately 30 times Red Hat’s free cash flow.
Looking Ahead: The big question mark for IBM, as with all of its major news, is whether it will be able to stick the landing. IBM CEO Ginni Rometty stated that the company expects to retain Red Hat’s culture by keeping all of its employees and running the business as a distinct unit. There is strong upside potential given IBM’s marketing reach and sales connections–but IBM shares closed down 4 percent today amid questions over the company’s ability to integrate successfully.
For more information about this transaction, click here to read the press release.
*Financial information from Factset and the press release
was not the advisor in this transaction.