IBM Shares Sunk to 9-year Low on Acquisition Plan

By Joyce Yu

Philadelphia, PA–People might soon be able to move data between cloud services platforms such as Dropbox, Netflix, Flickr, Google Drive, Microsoft Office 365, Yahoo Mail with the acquisition of Red Hat by IBM, according to the two companies in their joint announcement today.

Touted to be the “most significant tech acquisition of 2018”, the deal will cost IBM $34 billion or nearly a third of its market value. “The acquisition of Red Hat is a game-changer. It changes everything about the cloud market,” IBM chief Ginni Rometty said in a statement.

The cloud enables software and services to run on the internet instead of personal computers. But cloud platforms such as Dropbox, Netflix, Flickr, Google Drive, Microsoft Office 365, Yahoo Mail often don’t allow data to easily move between them. Together, IBM and Red Hat say they will be “strongly positioned to address this issue.”

Through the acquisition of Red Hat which currently provides technology solutions to Amazon, Microsoft and Google, IBM will automatically enter partnerships with its own competitors. IBM said it will continue the partnerships after the acquisition and work to expand on them.

Investors, however, are questionable about the hefty price-tag that IBM is paying for. IBM shares sunk to the lowest level in nine years Monday on the news. Financing the deal with a mixture of cash and debt, IBM will pay $190 each for all of Red Hat’s outstanding shares, representing a 63% premium to its Friday closing price of $116.68.

Adding pressure to IBM’s stocks is a possible downgrade by Moody’s Investors Service. The credit rating agency said it will put IBM’s A1 credit rating on review for a possible downgrade due to “substantial increase in leverage” … and a “departure from IBM’s historical acquisition philosophy of making small, tuck-in acquisitions that limit integration risk.”

The valuation of the deal which still needs approval from shareholders and regulators is a “fair price” to Rometty. She told CNBC that she can both integrate the company, generate earnings and continue growing IBM’s dividend despite the $33 billion it will lay out for the Raleigh, North Carolina-based group.  The proposed deal is expected to close in the second half of 2019.

IBM reported a weaker-than-expected third quarter revenues earlier this month as cloud computer deliveries slowed and a stronger U.S. dollar weighed on international sales.