There is news this evening that IBM is making a big acquisition.
What shocks me about it is the price paid in relation to not only profits but even revenues. Based on this I dearly wish that some of the companies I own and that are on our list would be acquired. Big premiums are not usual in acquisitions.
- IBM announced plans to acquire Red Hat in a deal valued at about $34 billion.
- Prior to the acquisition, Red Hat’s market capitalization stood at approximately $20.5 billion.
- The acquisition is by far IBM’s largest deal ever, and the third-biggest in the history of U.S. tech.
“IBM will pay cash to buy all shares in Red Hat at $190 each. Shares in Red Hat closed at $116.68 on Friday before the deal was announced.”
“The acquisition is by far IBM’s largest deal ever, and the third-biggest in the history of U.S. tech. Excluding the AOL-Time Warner merger, the only larger deals were the $67 billion merger between Dell and EMC in 2016 and JDS Uniphase’s $41 billion acquisition of optical-component supplier SDL in 2000, just as the dot-com bubble was bursting.”
NOTE that Time’s purchase of AOl was a complete disaster so was the JDS Uniphase deal mentioned. I don’t know about the Dell deal.
“The company, which went public at the peak of the dot-com boom in 1999, earned $259 million on revenue of $2.92 billion in its last fiscal year, which ended Feb. 28. Its revenue grew 21% between the 2017 and 2018 fiscal years.”
So, let’s see, IBM is paying 131 times earnings and 11.6 times revenue!!!
This can probably be explained by what Warren Buffett calls excessive Animal Spirits. IBM must have gotten absolutely rabid in its hot pursuit. And I suspect Buffett is glad that he no longer owns much if any IBM shares when they are making this kind of deal!
For most of the companies on our list, I suspect that a large premium would be needed to make an acquisition happen. And if some buyer wanted these companies they probably would be willing to pay the premium needed. Unfortunately there is no sign that any acquisition offers will be made.
But it is comforting to to realise that even as stock prices have gone down, there could be acquirers out there willing to pay big premiums. Hurray for Animal Spirits!