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IBM pulls out the checkbook, and you choose to play the attack

An agreement that will change the entire industry. It is one of those phrases that is repeated endlessly in the universe technology to justify the corporate alliances that are forged in the business of data management. In the case of the operation by which IBM buy Red Hat is a necessity. Bet Big Blue is unambiguous: disburses 34,000 million ($30.300 million euros), its largest acquisition to date. It is, as they say on Wall Street, of evolve or die.

Ginni Rometty, its chief executive for nearly seven years —although he has been in the business since the decade of the nineties, believes that the experience and the technology of Red Hat will revive the growth of IBM and take on the multinational of the stagnation that drags. It is something that he did before, when he surprised the market when shelling out of 3,500 million by the creator of the management programs Lotus back in 1995. After the merger, Lotus was able to double their sales each year thanks to the massive global distribution network of IBM.

The executive had played up to now on the defensive, trying new sources of growth on artificial intelligence and security. Now goes on the attack. Red Hat is smaller than IBM, but has a great potential in management services in platforms hybrid. The seller-based programs in the Linux operating system has 12,000 employees, 30 times less than its rival. Its sales were around usd 2,900 million in 2017, compared to 22.500 million of IBM, to which the services in the cloud generated 5,500 million.

IBM, therefore, can function again as a facilitator with a valuable base of customers in information technology that includes Fortune 500 companies, financial institutions, public agencies, and universities. Red Hat was growing currently at a rate of 20% per year, while its rival VMware does something more than 10%. Going alone, it was estimated that it could double sales in just three and a half years. Together, however, can go faster.

MORE INFORMATION IBM acquires Red Hat to compete with Amazon and Microsoft, IBM is making foot

But as pointed out from HWVP, a venture capital fund that invests in emerging companies in the technology sector, everything moves very fast in the cloud. Therefore, they believe that IBM should make a bet so strong to not be left behind in the face of Amazon, Microsoft and Google. What just do also SAP with the purchase of Qualtrics, a transaction more modest valued at 8,000 million, which is announced the same week that I was going to start trading. “The interesting Betboo thing will be to see how they manage to integrate an open-source platform in its architecture,” states HWVP, “because it is not so obvious” despite the synergies that may exist between the two companies. This is the wedding of the last 50 years of technological advancement with the next 50 years of innovation in an industry in constant evolution. IBM paid a premium of 60%. The value of the operation is, therefore, high if you think that is equivalent to 30% of its capitalization. But there are analysts who highlight the figures that Red Hat is able to generate a cash flow of 1,000 million.

Rometty was the first to speak of the data as a new raw material that drives the economy. Now he wants that the acquisition of Red Hat define his legacy. To demonstrate that you believe in this bet, is made with the equivalent of three million dollars in shares of IBM, days after announcing the acquisition. Four other board members also bought shares. But these maneuvers are not a guarantee of the securities of the company are to recover. They lose almost 15% of its value in the last three months and nearly 20% when it is taken as a reference year. IBM, as pointed out by different analysts, has many problems still to solve. “40% of the income of the company”, pointing from Moffett Nathanson, “come from areas of business in information technology contract”.

Red Hat allows you to reorder the portfolio of data management services and manage a volume of business greater to that area. That push, for its size, would not solve the central challenge facing IBM. The analysts of RBC Capital remind us that the contribution additional to the revenue of the group is not very large, less than 5%. However, they believe that it is an opportunity for the company to no longer be anchored in the past as did Satya Nadella with Microsoft.

During the presentation to the market of the operation raised many questions about how to integrate cultures so different. IBM and Red Hat are competitors, but working together since a long time ago because with the passage of time, the Linux operating system managed to be implemented as an alternative platform in the world of the company. Increasingly more companies left to install their own data centers and are outsourcing this infrastructure.

Rometty tries to enter a market in which it sees that it can't penetrate solo. The analysts from BTIG consider that this operation highlights the desperation that is in the bosom of IBM not to be left behind again. “Missed the train five years ago. What is surprising is not that to purchase this company, but they have taken so much.” Red Hat was in all pools of corporate operations, from a long time ago because it has the necessary scale to be attractive in the eyes of Oracle or Cisco.

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