Market Overview

Wedbush: IBM-Red Hat Deal Holds Execution Risks

Share:
Wedbush: IBM-Red Hat Deal Holds Execution Risks

IBM (NYSE: IBM) closed on its acquisition of Red Hat Inc (NYSE: RHT) Tuesday. 

While the deal marks IBM’s acquisition of “critical mass” in the hybrid cloud market, the deal poses potential execution and other risks, according to Wedbush.

The Analyst

Moshe Katri maintained a Neutral rating on IBM with an unchanged $165 price target.

The Thesis

With the acquisition of Red Hat, IBM looks to become the world's leading hybrid cloud provider, according to Wedbush. 

Most companies are in the early stages of cloud adoption, where the intention is to increase compute power for cost-cutting. The combination of IBM and Red Hat could enable companies to shift business applications to hybrid cloud to maximize benefits of the cloud for their businesses and driving growth, Katri said in a Wednesday note. (See his track record here.) 

Yet the deal values Red Hat at $34 billion, which represents a substantial premium to the current multiples of cloud peers, the analyst said. 

IBM expects the deal to boost revenue growth, gross margin and free cash flow within 12 months of closing. On the other hand, the company plans to suspend share repurchases in 2020 and 2021, Katri said. 

Red Hat has a volatile billing history and the deal poses execution challenges, he said.

“In order to unlock shareholder value, we advocated a different approach, which would have included an aggressive restructuring of IBM’s underperforming business, with a focus on improving profitability, returns and FCFs.”

Price Action

IBM shares were up 1.17% at $140.93 at the time of publication Wednesday.

Related Links:

Investors Sell The News Of IBM-Cloudera Rumor

IBM, Walmart, Merck Included In FDA Program To Test Blockchain Usage In US Drug Supply Chain

Latest Ratings for IBM

DateFirmActionFromTo
Aug 2019MaintainsMarket Perform
Aug 2019MaintainsBuy
Aug 2019MaintainsBuy

View More Analyst Ratings for IBM
View the Latest Analyst Ratings

Posted-In: Moshe Katri WedbushAnalyst Color Price Target Reiteration Analyst Ratings Best of Benzinga

 

Related Articles (IBM + RHT)

View Comments and Join the Discussion!

Latest Ratings

StockFirmActionPT
CHTRGuggenheim SecuritiesMaintains488.0
XCredit SuisseMaintains8.0
ATUSGuggenheim SecuritiesMaintains33.0
VMCNomuraMaintains182.0
AYICredit SuisseMaintains154.0
View the Latest Analytics Ratings
Don't Miss Any Updates!
News Directly in Your Inbox
Subscribe to:
Benzinga Trading Daily
Get pre-market outlook, mid-day update and after-market roundup emails in your inbox.
Market in 5 Minutes
Everything you need to know about the market - quick & easy.
Daily Analyst Rating
A summary of each day’s top rating changes from sell-side analysts on the street.
Thank You

Thank you for subscribing! If you have any questions feel free to call us at 1-877-440-ZING or email us at vipaccounts@benzinga.com

From Coffee To Cannabis: Colombian Legislators To Move For Adult-Use Legalization

Curaleaf Names New President, Senior VP Of Compliance