Krishna on Monday said not to expect any “major divestitures.”
“I think those are behind us,” Krishna said. “Now we have the portfolio that allows us
to deliver on our medium-term more.”
But Holt said analysts had heard such sentiment before, followed by divestitures.
Sharp insight from that analyst.
https://www.bizjournals.com/triangle/news/2022/01/25/is-ibm-ready-for-another-mega-deal-like-red-hat.html
By: Lauren Ohnesorge – Senior Staff Writer, Triangle Business Journal
January 25, 2022
Two and a half years after IBM (NYSE: IBM) closed on its $34 billion mega-buy of Raleigh’s Red Hat, could another buyout be on the horizon?
It was a question posed to IBM executives Monday following the company's latest quarterly earnings report, which saw revenue shoot up 6.5 percent to $16.7 billion. Red Hat revenue was up 19 percent in the fourth quarter to $6.2 billion.
With valuations starting to dip, analysts asked IBM CEO Arvind Krishna if more deals could be imminent. Krishna told analysts that while “some targets may become approachable,” IBM hasn’t changed its M&A formula.
“M&A has to have an economic benefit for our company and our shareholders,” he said, though he did point out that Big Blue has more than $20 billion in flexibility over the next three years.
“As prices come down, certainly, more things come within range,” Krishna said.
Logan Purk, an analyst with Edward Jones with a “buy” rating on IBM stock, said that with software valuations dropping, it could be “perfect timing” for IBM. Declining valuations “allow companies like IBM to be really aggressive in pursuing targets that, just two months ago were un-pursuable," he said.
Park sees two potential buckets: one involving companies that could expand IBM's hybrid cloud capabilities, and the other is consulting firms.
“If you could buy smaller agencies that bring in expertise for cloud, that further helps landing new business,” Purk said.
David Holt, an equity analyst at CFRA Research, maintained a “hold” rating on IBM Tuesday. Holt said he doubts IBM would make another “transformational” acquisition like it did with Red Hat.
“That’s assuming the initial strategy goes as planned,” he said.
On the consulting front, a smaller deal is possible, particularly as IBM works to stitch together different applications from partners such as Microsoft (Nasdaq: MSFT) and SAP. Should IBM pursue a deal in the consulting arena, Holt predicts something in the engineering arena would help them fill the gaps and make “a more full, rounded spectrum of opportunities and offerings to bring to clients.”
However, he did say that despite what IBM executives said on the earnings call, a divestiture could be on the horizon, pointing to the company's Watson product as a possibility. IBM on Friday said it is selling some of its Watson Health assets for more than $1 billion.
Krishna on Monday said not to expect any “major divestitures.”
“I think those are behind us,” Krishna said. “Now we have the portfolio that allows us to deliver on our medium-term more.”
But Holt said analysts had heard such sentiment before, followed by divestitures.
Both Purk and Holt saw improvement for IBM in the latest numbers.
In a note to analysts Tuesday, Holt wrote that IBM’s fourth quarter results “cleared expectations.” Purk called the results “certainly promising.”
IBM CFO Jim Kavanaugh told analysts on an earnings call that it was a new start.
“Bottom line, we’re exiting 2021 a different company,” said Kavanaugh, pointing to higher growth and a higher “value business mix,” as more than 70 percent of IBM’s revenue is now tied to software and services.
IBM was trading at $131.71 Tuesday afternoon, up 2.2 percent. The 52-week high is $146.37.