4 ETFs To Tap IBM-Red Hat Potential Growth Deal

Amid uncertainty surrounding the trade war and mid-term election, the technology sector, which saw brutal trading this month, is sizzling hot once again following the mega merger deal. This is especially true given that International Business Machines (IBM – Free Report) has agreed to acquire the software company Red Hat Inc. (RHT – Free Report) for $34 billion in all-cash deal in in the biggest acquisition of its 100-year history.

Under the terms of the deal, IBM would be paying $190 per share in cash for Red Hat, nearly 63% premium to the Oct 26 closing price and a roughly 7% premium to the 52-week high that it set in June. The transaction, expected to close in the second half of 2019, has been approved by the boards of directors of both IBM and Red Hat but is yet to get approval of Red Hat shareholders as well as U.S. regulators.

If approved, this would be the third-largest tech deal after Dell Technologies buyout of EMC for $67 billion in 2016 and the $41 billion acquisition of SDL by JDS Uniphase in 2000, excluding the AOL-Time Warner merger.

The deal will be a big leap for IBM and is a game-changer in the fast-growing and lucrative cloud market. Per IBM Chairman, President and Chief Executive Officer, “IBM will become the world’s #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.” IBM said it remains “committed to maintaining strong investment grade credit ratings” and will target a leverage profile consistent with “a mid to high single-A” grade.

Additionally, the acquisition will reinforce IBM’s high-value model. It will accelerate IBM’s revenue growth, gross margin and free cash flow within 12 months of closing. It also will support a solid and growing dividend. However, the tech giant intends to suspend its share repurchase program in 2020 and 2021.

Market Impact

Though the acquisition is the best way for IBM to capture a greater share of the cloud market in the coming years per CEO Ginni Rometty, the huge premium paid for the deal pushed the IBM shares to the lowest level since Feb 11, 2016 at the close. The high price is view as reducing spending, cutting share buybacks, and has even drawn negative attention from credit rating agencies. The S&P downgraded IBM to A from A+, following the merger announcement while Moody’s placed its A1 rating under review for downgrade. IBM saw massive trading volume of 20.5 million on the day compared with average daily volume of 5 million.