IBM Wins $ 190 Per Action – The Motley Fool

October 28 IBM (NYSE: IBM) announced that he would pick up Red Hat (NYSE: RHT), which was described in the press release announcing the transaction as "the world's leading provider of open source cloud computing software".

Let's review the terms of the agreement and what it will mean for the shareholders of Red Hat and IBM.

Source of the image: IBM.

Big salary for Red Hat shareholders

Red Hat shares peaked at $ 177.70 per share in June, before falling sharply after the company issued – as my colleague Leo Sun described – "lukewarm advice." Shares closed at $ 116.68 on October 26, down 34%.

The good news is that if you stick with it, IBM is preparing the game, and more. The companies said IBM would pay $ 190.00 per share for Red Hat, a near 63% premium at closing Friday and about 7% at the 52-week high that it had reached in June. According to the press release, it is a deal in cash, financed by IBM "by a combination of cash and debt."

"By joining forces with IBM, we will have more scales, resources, and capabilities to accelerate the impact of open source as a foundation for digital transformation and bring Red Hat to an even wider audience – while preserving our unique and unwavering culture of commitment to open source innovation, "said Jim Whitehurst, President and CEO of Red Hat.

Strengthen IBM's cloud efforts

IBM's business has been relatively limited by growth for a while. After posting a few quarters of modest growth in its business volume over the previous year, the company announced a 2% drop in its business turnover in the last quarter (although the company stated that the result was "unchanged according to the currency"). Analysts expect the company's sales to drop by 3.2% in the fourth quarter. For the year, they model IBM's revenue growth of 0.7%, although sales are expected to decline 0.7% the following year.

IBM Revenue Data (Quarterly Annual Growth) by YCharts

Although IBM's business as a whole did not generate good growth, there is rooms growth in business but offset by declines in other areas. The company's cloud business is one of these areas of growth, which, according to IBM, has reported revenue of $ 19.0 billion in the third quarter [the] Last 12 months "and has increased by 20% over the same period last year (and, according to the company, was" up 18% taking into account the currency ").

This is not as well It is therefore surprising that IBM is recruiting a rapidly growing cloud computing software manufacturer to reinforce its efforts.

In the press release announcing the deal, the two companies said the Red Hat acquisition "will accelerate IBM's revenue, gross margin and free cash flow growth in the next 12 months." fence".

Since IBM is a high-yield technology stock, currently offering a dividend yield greater than 5%, the press release included the following line, perhaps to assure IBM's shareholders that this relatively large acquisition (the purchase price announced) "[represents] a total value of the company of approximately $ 34 billion ") would not detract from Big Blue's dividend strategy:" It will also support a strong and growing dividend. "

IBM Dividend Data by YCharts

The agreement, according to the companies, "should be finalized during the second half of 2019."

Ashraf Eassa does not hold any of the shares mentioned. The Motley Fool has no position in the mentioned actions. Motley Fool has a disclosure policy.