Why Did IBM Buy the Playful Red Hats

Red Hats society

In November when I read https://www.ibm.com/investor/financials/ (IBM) were courting Red Hat for a boatload $34 Billion, I thought “Oh Boy, the ‘Red Hat Society’ Moms hit the jackpot!”

The Red Hat Society is a fun-loving group of women, decked out in red hats (not baseball caps; hats worthy of Kentucky Derby status). A playful bunch to empower each other to pursue their passions.

IBM Acquisition of RHT

IBM’s pursuit probably should have been for the pizzazz of the red-hat Mom’s; but they received U.S. and shareholder approval for Red Hat Inc. RHT is the world leading provider of open-cloud solutions and the emerging leader in the platform for hybrid-cloud and multi-cloud. The European Union bid decision was slated for June 27, 2019.

Acquisition Fundamentals

The general idea of the acquisition is that the joint technology radically changes cloud computing growth. I struggle to understand what IBM gets with Red Hat, that it did not already have, to justify $34 Billion, as well as the market opportunities to justify the purchase. At the same time, IBM will now be the undisputed leader in hybrid-cloud.

I’m also skeptical the Red Hat acquisition is going to be meaningful over the long term for IBM. The argument that the marriage is more than the individual parts is not a strong one in my view. But it will take some time for the market to see how IBM digests RHT.

Update: The buyout of game-changing Red Hat closed July 9, 2019. This was an all-cash transaction and added more than $20 Billion of new debt to IBM and alters their financial calculations dramatically. IBM is working out the detailed bottom line implications and will present the impact of owning Red Hat on August 2, 2019.

Another update ! July 16th IBM announced that AT&T is shifting its business service applications to IBM’s cloud in a multi-year deal worth “billions”. Now; if IBM, Red Hat and AT&T can play nice together, the prospects for shareholders could be meaningful long term.

Mom’s Takeaway of IBM/RHT

July 17, 2019 IBM share price was $143.07. ARE YOU A BULL or BEAR ?

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