IBM really seems different with red hat
IBM
takes great risk of buying
Red hat
Doing nothing would be risky.
The original major technology company, International Business Machines, makes its biggest acquisition for more than a century with its $ 33 billion acquisition of Red Hat.
The all-cash deal, announced Sunday, represents about 29% of IBM's total market value over last week's closing price and is more than double the company's last reported cash balance of $ 1[ads1]4.7 billion. [19659005] As such, the agreement will significantly add to IBM's debt burden and likely reduce the credit rating and increase borrowing costs. Toni Sacconaghi of Bernstein estimates that IBM's annual interest expense will increase an additional $ 1 billion a year as a result.
An expensive move, in other words, and not one that will immediately become "transformation" in the deal. Red Hat is investing about $ 3.4 billion in revenue for the current fiscal year, which will increase about 4% to IBM's total.
Red Hat thus brings a relatively high margin software business to IBM's stable offer. More importantly, Red Hat gives IBM a significant boost in the industry to sell hybrid cloud services to corporate customers. Such services involve companies that use a mix of public services such as Amazon Web Services along with their own private cloud networks. About 85% of all businesses are expected to adopt a hybrid cloud approach, according to a forecast from Jefferies & Co.
Red Hat is a major effort of IBM in the right direction. Much will depend on integration, while Red Hat also does significant business with IBM's competitors.
IBM states that Red Hat will be run "as a distinct entity" with today's CEO Jim Whitehurst, who reports directly to IBM's boss Ginni Rometty while maintaining his current headquarters and practices. It is worth noting that VMware has already shown that such a model can work. That company has managed to maintain its independence under the ownership of EMC and reach Dell.
However, IBM has never reached an agreement of this size, and in more than nine times Red Hat's resale, the bid on Red Hat implies a tidy premium even in the expensive sky.
But IBM needed to do something else. Revenue peaked in 2011, while free cash flow peaked a year later. IBM's shares have beat Nasdaq in a better part of five years. Shrinking tech giants have limited appeal, even for impaired investors.
Buying Red Hat will give the Big Blue cloud a tight boost.
