IBM (IBM) this weekend agreed to buy Linux distributor Red Hat (RHT) for around $34B to expand its cloud-based services, and expects the deal to speed up its revenue growth and raise margins. IBM CEO Ginni Rometty said the acquisition "changes everything" about the cloud market. Following the news, several analysts weighed in on the deal, with some considering potential targets for M&A that could be up next.
POTENTIAL TARGETS: JPMorgan analyst Sterling Auty told investors in a research note that the volume of acquisitions in Software appears to be picking up with over 70 transactions announced year-to-date, including the IBM/Red Hat deal. Deals announced this year appear to fall into one of three buckets, Auty said: strategic, where the acquirer looks to gain a strong foothold in a new segment; vertical acquiring companies; and valuation, with acquirers going after assets with discounted valuations. The analyst sees "a number" of companies fitting these characteristics in his coverage that may be takeover targets, including Okta (OKTA), Palo Alto Networks (PANW), ServiceNow (NOW), RingCentral (RNG), Aspen Technology (AZPN) and DocuSign (DOCU) in the strategic category; Guidewire (GWRE), Veeva (VEEV), Medidata (MDSO), Ellie Mae (ELLI) and Q2 Holdings (QTWO) as potential targets in the vertical industry exposure category; and FireEye (FEYE), Carbon Black (CBLK), Secureworks (SCWX), Akamai (AKAM) and LogMeln (LOGM) as possible candidates in the attractive valuation category.
IMPACTS ON CLOUD LEADERS: Wedbush analyst Daniel Ives believes the IBM/Red Hat deal will have wide-reaching ramifications not just for IBM, but for the broader cloud and tech space. In a research note of his own, Ives said the deal could be a "major shot across the bow" from IBM and CEO Rometty to core cloud players like Amazon (AMZN), Microsoft (MSFT) and Google (GOOG, GOOGL) that there is another player in town that plans to aggressively compete in this massive secular hybrid cloud shift. Ives believes the combination of Red Hat and its Linux cloud platform with IBM could represent a "formidable" cloud behemoth for the coming years. Oppenheimer analyst Timothy Horan said that IBM and Red Hat have lagged leaders such as Microsoft, Amazon and Google in the cloud, and, given how far behind they are in infrastructure, the analyst believes they may look to partner much more with Google, which is a threat to Microsoft more so than AWS. Morgan Stanley analyst Keith Weiss said in his own research note that the IBM/Red Hat announcement reinforced his confidence in the emergence of Hybrid Cloud architectures, the strength of IT spending into 2019 and continued "pockets" of opportunity within the software space. Red Hat has been Microsoft's primary competitor within server operating systems, and has generally been taking share, said Weiss, who thinks the longer-term opportunity or threat for Microsoft hinges on the ability of IBM to execute well and maintain the open source enthusiasm around the Red Hat distributions.
OTHERS IN THE HYBRID SPACE: Weiss also touched on others in the Hybrid Cloud space, saying he sees little near-term impact for VMware (VMW) and Pivotal Software (PVTL), but added that the proposed IBM/Red Hat combination would likely result in a fiercer competitive environment going forward. For New Relic (NEWR), he sees little direct competitive impacts from the proposed merger. Similar to New Relic, Weiss said MongoDB (MDB) is positioned as a "favored" database among developers, and noted that the company recently signed a strategic partnership with IBM in April. Given HortonWorks' (HDP) strong existing ties to IBM, Cloudera (CLDR) could benefit by becoming a preferred data management vendor within the OpenShift ecosystem, Weiss contended.
PRICE ACTION: In morning trading, shares of IBM are down 1.6% to $122.77, while Red Hat is up nearly 48% to $172.18.
IBM
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Red Hat
+55.415 (+47.50%)
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Alphabet
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Changed symbol to MDNT
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Acquired by AVGO
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Cloudera
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Hortonworks
+0.67 (+3.95%)