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IBM Earnings Certificate Company Paid the Right Price for Red Hat



CNBC's Jim Cramer on Thursday broke down why IBM's $ 34 billion price tag to buy Red Hat was worth the price.

Paid $ 190 a share for open source software, the October deal came to a 63% premium partially. Cramer claimed that the prize is understandable because IBM was not the only bidder. In late 2018, Red Hat revealed that there were three other bidders without naming names. CNBC previously reported an offer from the alphabet's Google was entertained, and Stifel analyst Brad Reback also said that Google, Amazon, and Microsoft engaged in discussions.

"It was a competitive situation, people, so IBM paid what they had to pay to get the job," said the "Mad Money" host. "But, honestly, the 63% figure is a little misleading, honest."

The premium is not quite as fierce in relation to Red Hat's average share price last year, Cramer said. At the time of the announcement, Red Hat traded at $ 1

16 per share. The stock, on average, sold below $ 142 per share in 2018, which instead comes in at a 34% premium, he said. The deal was closed earlier this month.

Since the agreement was announced in October, the rest of Cramer's "cloud king" basket of hot cloud-based tech shares, which once included Red Hat, increased the market cap as a group of 54%. They also trade on average for 54 times next year's earnings, the host said. However, IBM paid 46 times for Red Hat, he noted.

"If anything, I must tell you, based on these comparisons, that you could argue that they paid for this company," Cramer said. "In other words, I don't think they overpaid what this business was really worth."

Big Blue, which made a name for itself that sells hardware, turns into the cloud-based software business as a way to increase revenue growth, he said. Artificial intelligence and analysis are also part of the focus. The company wants to provide a platform for managing hybrid cloud IT infrastructure, and Red Hat is a solution, he said. Red Hat, who wants to keep its identity and management as a subsidiary, allows IBM to combine private servers with third-party cloud computing.

IBM has been working to capture Amazon and Microsoft in the cloud infrastructure. At the time of the takeover, CEO Ginni Rometty called it a "fair price" to become "the number one hybrid cloud provider."

Red Hat is critical, said Cramer, when IBM reported a quarter last year, but thanks to cloud revenue was in line with Wall Street expectations, although it fell 4% the year before.

Red Hat was not included in the numbers.

"I think these results more than determine IBM's decision to pay $ 34 billion" for the company, he said. "They needed a change of direction and that's what Red Hat gives them. That's why I still think the stock is worth owning here even up here after this fine day."

WATCH: Cramer breaks down Red Hat's price tag [19659013] Enlightenment: Cramer's charitable trust owns shares in alphabet, amazon and alphabet.

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