A Reuters article has revealed the concerns shared by IT analysts on the $34 billion deal between IBM and Red Hat making IBM a leading player in hybrid cloud business.
First, the breakup fee for the deal, which would be among the largest on record in the tech sector, has yet to be announced and a high fee would also deter Red Hat from entertaining other buyers.
Second, investors were concerned that, at 10 times 2019 projected sales, IBM had overpaid for the deal to buy Red Hat.
Headquartered in Raleigh, North Carolina, Red Hat has reported revenue of $823 million (+14 percent) with subscription revenue of $723 million (+13 percent), representing 88 percent of total revenue, in the second quarter of fiscal year 2019 ended August 31, 2018.
Third, brokerage firm Stifel, raised the prospect of a competing offer from one of the other major players in cloud computing.
Analysts from Stifel indicated in a note that Google, Amazon, and Microsoft and potentially Oracle have the strategic motivations and financial resources to make a competing bid for Red Hat.
Fourth, the combined entity will also sell software that runs on its customers own hardware and other clouds. That will put it in direct competition with firms like Microsoft, which has a similar mix of software and cloud services.
“We are going to both compete and partner with those other clouds,” said IBM CEO Ginni Rometty.
Jim Whitehurst, the CEO of Red Hat, said the use of multiple clouds has been an advantage for Red Hat. IBM will retain Jim Whitehurst and his team and run Red Hat as a separate business.
Red Hat’s shares moved up about 50 percent on Monday, reflecting the huge premium IBM is paying to ward off any potential challenger bids.
“This is a very fair price…Red Hat CEO Jim Whitehurst has built a great company, and unlike others, high growth, high profit and cash and so this is why I think really those are important things for our investors,” IBM CEO Ginni Rometty told CNBC
The increasing use of cloud services from multiple providers was the driving force behind the deal along with the rise of the hybrid cloud, Ginni Rometty told Reuters.
Hybrid cloud will allow companies to run some of their software in their own data centers and other elements of it in data centers run by IBM, Amazon Web Services or Google Cloud, among others.
Red Hat has been investing heavily in tech tools such as containers, which make it easier for businesses to split up their computing work among a mix of data centers.
In buying Red Hat, IBM will have assembled a cloud that includes physical servers, its own operating system and applications like human resources software.