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The high price paid by IBM for software group Red Hat helped send its shares 5 per cent lower in early trading on Monday, as investors expressed concern about the premium offered by the computing pioneer.
The $34bn price tag announced on Sunday evening was 63 per cent higher than Red Hat’s closing price on Friday, and the morning sell-off put IBM at risk for its third-biggest fall this year.
The takeover is part of IBM’s search for new revenue streams, as growth has slowed and shares struggled to regain the momentum last seen in 2016.
Although analysts have known Ginni Rometty, IBM’s chief executive, has been working to overhaul the company, the size of the deal — the largest in its history — took some by surprise. The deal dwarfs the size of IBM’s previous biggest acquisition of business intelligence software company Cognos for nearly $5bn in 2007.
“While we expected some type of significant strategic change near-term, we did not expect an acquisition of this magnitude and perhaps the recent market volatility created the opportunity,” said David Grossman, an analyst at Stifel.
IBM has reassured investors that it will not be changing its dividend payouts, but will suspend its share buybacks programme for 2020 and 2021.
“There is strong strategic rationale for the purchase, which should be viewed positively. That said, the relative size of the transaction and the incremental leverage will likely raise concerns as may the timing,” Mr Grossman added.
Jeffrey Kvaal, an analyst at Nomura, said that the premium paid for Red Hat was “obviously rich”, but added the multiple of sales that IBM was paying was lower than in Microsoft’s GitHub deal or Salesforce’s acquisition of Mulesoft, with recent declines in Red Hat’s share price further accentuating the premium.
“The deal is pricey. However, we believe it works both financially and strategically,” he said. “This is as transformative as it gets for IBM.”
On Monday, Ms Rometty tried to position the deal as the start of a new phase of growth for IBM, which has been contracting for most of her seven years at the helm.
“This is all about growth,” she said during a call with analysts. IBM’s revenues dipped again in the latest quarter, ending a shortlived recovery, as growth from newer businesses like its Watson AI technology was overwhelmed by shrinkage in its traditional IT business.
Ms Rometty also sought to shake off the defensive mood that has settled on Big Blue as new cloud computing platforms like those run by Amazon and Microsoft have become central to the IT market.
“We’re playing to be number one,” she said, claiming that the deal would position IBM as a counterweight to the leading cloud companies.
She added that by buying Red Hat, IBM would have a stronger alternative by stitching together customers’ existing data centres with newer cloud services, in an approach known as “hybrid cloud”.
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