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KIEV, UKRAINE – 2018/10/25: Red Hat Software company logo. Red Hat, Inc. is an American multinational software company providing open-source software to the enterprise community. (Photo by Igor Golovniov / SOPA Images / LightRocket via Getty Images)
IBM is shrinking – IBM's revenue is down to 35% since its current CEO took over at the beginning of 2012.
So what better time to make the biggest acquisition in its history? That's what IBM's October 29 deal to pay $ 33 billion – a 63% premium over its close-up CNBC.
Linux software operating systems, middleware, storage, virtualization, and management tools. The company reports revenue through two categories: subscriptions, and training and services. The Americas contributed approximately 64% of total revenue in fiscal 2018; Europe, the Middle East and Africa contributed 23%; and Asia-Pacific contributed 14%, according to Morningstar.
Red Hat is a steadily growing and profitable company that throws off lots of cash. In the last five years, sales were up 17.1% to $ 2.92 billion, net income was up 11.5% to $ 259 million, and 19% to $ 821 million, according to Morningstar.
Sadly, Red Hat slipped in its most recent quarter. That 's when it' s missed, and it 's likely that it' s falling in the red, that it 's falling, are down 28% percent over the past six months through October 26.
Is this deal a good thing for IBM shareholders? Investors do not love this deal – it's worth it. (I have no financial interest in the securities mentioned in this post).
To be fair, Red Hat competes in an attractive industry. However, the company will not be better off, it will be more difficult to integrate the two companies.
Industry Attractiveness: Pass
Red Hat's industry – providing services and training for companies that use open source software – is large, growing, and profitable. As Red Hat CEO, Jim Whitehurst, said in an SEC filing, "We believe our total addressable market to be $ 73 billion by 2021. If software is eating the world – it is truly open source is the key ingredient. "
What's more, IDC reported that IDC – with 32.7% of the server operating system market in 2017 – lagged only Microsoft. Within the Linux segment, IDC found that Red Hat Enterprise Linux adoption grew by nearly 20% in 2017.
Better Off: Fail
To be sure, IBM and Red Hat touted the deal as a way to compete with Amazon and Microsoft in the so-called hybrid cloud. But IBM's approach to integrating acquisitions makes it more likely that the combined companies will be able to get their act together and offer better service and gain market share.
For one thing, IBM is famous in its acquisitions for imposing internal requirements on its products rather than a more focused, efficient solution.
IBM has been shipping servers with Red Hat for years – and this deal will save IBM is paying for it. cloud infrastructure revenue in 2017.
What's more, companies have bought Red Hat products because it was considered vendor neutral. Whitehurst, told CNBC that the combined company would be the largest contributor to open-source software. "We will [also] remain distinct because we want to understand that Red Hat is coming to a neutral sell. "
But as part of IBM, Whitehurst will have an insurmountable challenge in trying to explain how to reduce the cost of ownership. This will be especially difficult as it's going to be marketed to Big Blue's bureaucracy.
Net Present Value Greater Than Zero: Fail
By paying so much for Red Hat, it will take some heroic assumptions for this deal to generate a positive net present value. IBM has about $ 80 billion in annual revenue and Red Hat would add 3.8 percent to Big Blue's top line.
This is not so much but it could be worse. After all, it assumes that customers stick with Red Hat. Of course, companies who have previously bought from Red Hat because it was perceived as neutral,
Moreover, Red Hat would only add 6% to IBM's free cash flow. To be sure, I would not doubt that it would be possible to make assumptions that would cause this 63% premium to result in a positive net present value. But I think IBM is overpaying.
Integration: fail
One of the key reasons that mergers fail is because of the acquired company can not retain the best people in the acquired company. One factor causes people to leave is a change in its culture. And Red Hat believes that its culture is critical to its success. According to its latest annual report,
We believe that our corporate culture is one of our successors, which we believe in innovation, creativity and collaboration. As our organization grows, our employees and our resources become more globally dispersed and our organizational management structures become more complex, we can find it more difficult to maintain these beneficial aspects of our corporate culture. If we are unable to maintain our corporate culture, we may find it difficult to attract and retain motivated employees, continue to perform at current levels or execute on our business strategy. As a result, our business, financial condition, operating results and cash flows could be adversely affected.
Will this culture survive being acquired by IBM? IBM Watson, I would vote for no. Rometty goal told the Wall Street Journal that IBM intends to retain Red Hat 's culture and brand.
To be fair, this is an outstanding deal for Red Hat investors who will not doubt the huge premium IBM paid. Sadly, IBM shareholders are likely to be disappointed by the deal's failure to pass the tests for successful acquisitions.
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KIEV, UKRAINE – 2018/10/25: Red Hat Software company logo. Red Hat, Inc. is an American multinational software company providing open-source software to the enterprise community. (Photo by Igor Golovniov / SOPA Images / LightRocket via Getty Images)
IBM is shrinking – IBM's revenue is down to 35% since its current CEO took over at the beginning of 2012.
So what better time to make the biggest acquisition in its history? That's what IBM's October 29 deal to pay $ 33 billion – a 63% premium over its close-up CNBC.
Linux software operating systems, middleware, storage, virtualization, and management tools. The company reports revenue through two categories: subscriptions, and training and services. The Americas contributed approximately 64% of total revenue in fiscal 2018; Europe, the Middle East and Africa contributed 23%; and Asia-Pacific contributed 14%, according to Morningstar.
Red Hat is a steadily growing and profitable company that throws off lots of cash. In the last five years, sales were up 17.1% to $ 2.92 billion, net income was up 11.5% to $ 259 million, and 19% to $ 821 million, according to Morningstar.
Sadly, Red Hat slipped in its most recent quarter. That 's when it' s missed, and it 's likely that it' s falling in the red, that it 's falling, are down 28% percent over the past six months through October 26.
Is this deal a good thing for IBM shareholders? Investors do not love this deal – it's worth it. (I have no financial interest in the securities mentioned in this post).
To be fair, Red Hat competes in an attractive industry. However, the company will not be better off, it will be more difficult to integrate the two companies.
Industry Attractiveness: Pass
Red Hat's industry – providing services and training for companies that use open source software – is large, growing, and profitable. As Red Hat CEO, Jim Whitehurst, said in an SEC filing, "We believe our total addressable market to be $ 73 billion by 2021. If software is eating the world – it is truly open source is the key ingredient. "
What's more, IDC reported that IDC – with 32.7% of the server operating system market in 2017 – lagged only Microsoft. Within the Linux segment, IDC found that Red Hat Enterprise Linux adoption grew by nearly 20% in 2017.
Better Off: Fail
To be sure, IBM and Red Hat touted the deal as a way to compete with Amazon and Microsoft in the so-called hybrid cloud. But IBM's approach to integrating acquisitions makes it more likely that the combined companies will be able to get their act together and offer better service and gain market share.
For one thing, IBM is famous in its acquisitions for imposing internal requirements on its products rather than a more focused, efficient solution.
IBM has been shipping servers with Red Hat for years – and this deal will save IBM is paying for it. cloud infrastructure revenue in 2017.
What's more, companies have bought Red Hat products because it was considered vendor neutral. Whitehurst, told CNBC that the combined company would be the largest contributor to open-source software. "We will [also] remain distinct because we want to understand that Red Hat is coming to a neutral sell. "
But as part of IBM, Whitehurst will have an insurmountable challenge in trying to explain how to reduce the cost of ownership. This will be especially difficult as it's going to be marketed to Big Blue's bureaucracy.
Net Present Value Greater Than Zero: Fail
By paying so much for Red Hat, it will take some heroic assumptions for this deal to generate a positive net present value. IBM has about $ 80 billion in annual revenue and Red Hat would add 3.8 percent to Big Blue's top line.
This is not so much but it could be worse. After all, it assumes that customers stick with Red Hat. Of course, companies who have previously bought from Red Hat because it was perceived as neutral,
Moreover, Red Hat would only add 6% to IBM's free cash flow. To be sure, I would not doubt that it would be possible to make assumptions that would cause this 63% premium to result in a positive net present value. But I think IBM is overpaying.
Integration: fail
One of the key reasons that mergers fail is because of the acquired company can not retain the best people in the acquired company. One factor causes people to leave is a change in its culture. And Red Hat believes that its culture is critical to its success. According to its latest annual report,
We believe that our corporate culture is one of our successors, which we believe in innovation, creativity and collaboration. As our organization grows, our employees and our resources become more globally dispersed and our organizational management structures become more complex, we can find it more difficult to maintain these beneficial aspects of our corporate culture. If we are unable to maintain our corporate culture, we may find it difficult to attract and retain motivated employees, continue to perform at current levels or execute on our business strategy. As a result, our business, financial condition, operating results and cash flows could be adversely affected.
Will this culture survive being acquired by IBM? IBM Watson, I would vote for no. Rometty goal told the Wall Street Journal that IBM intends to retain Red Hat 's culture and brand.
To be fair, this is an outstanding deal for Red Hat investors who will not doubt the huge premium IBM paid. Sadly, IBM shareholders are likely to be disappointed by the deal's failure to pass the tests for successful acquisitions.
