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IBM Stock’s Purchase of Red Hat Opens to Skeptical Reviews

International Business Machines (NYSE:IBM), once called Big Blue, has closed on its $34 billion purchase of Red Hat, but the crowds aren’t cheering.

IBM Stock's Purchase of Red Hat Opens to Skeptical Reviews

Source: Shutterstock

Since the deal was announced in October IBM shares have risen 17%, opening for trade July 11 at about $141, a market cap of $125 billion.

But the average stock in the S&P 500 average is up nearly 13% in that time, and the gain doesn’t come close to equaling the purchase price.

Investors are skeptical that this deal will vault IBM into the higher reaches of the technology universe. A year ago, Facebook (NASDAQ:FB) lost $124 billion in market cap in a single day.  Oracle (NASDAQ:ORCL), long considered a cloud also-ran, is worth $200 billion.

In today’s technology universe, in other words, IBM is a welterweight.

No Magic Bullet for IBM Stock

It’s clear that the Red Hat deal is no magic bullet for all that ails IBM.

Red Hat was a fast-growing software company whose Linux operating system, JBoss middleware and, most especially, OpenShift container system were becoming key ingredients for companies transforming their computing systems into clouds. IBM was a lumbering, no-growth maker of mainframes, an outsourcer of software development.

Together they’re supposed to be the place to go for “hybrid cloud,”  a world where corporate data centers run the same technologies as Amazon (NASDAQ:AMZN) AWS or Microsoft (NASDAQ:MSFT) Azure, where companies move data freely among their own clouds and the public clouds.

The problem is that most companies have already set their hybrid cloud strategies, that Red Hat’s enabling technology is a small part of the whole, and that IBM itself is still a bureaucratic labyrinth where good ideas go to die.

The hope was that Red Hat would combine its speed with IBM’s heft. The fear is that Red Hatters, as they’re called, will take the $190/share they’re getting and run away.

Hobble the Competition

If IBM can’t catch up with the Cloud Czars, the company figures, it can at least hobble them.

The company’s first post-Red Hat white paper is a proposal to regulate what IBM lawyers call “media companies,” amending the Communications Decency Act to make Facebook, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google and any other free web services responsible for what people post to them. IBM itself was under anti-trust consent decrees for decades. Its lawyers know how government can stop innovation in its tracks.

The idea, in the words of IBM CEO Ginni Rometty, is to distinguish between “business data” and “consumer data,” regulating the latter and letting the former mostly slide.  IBM is entirely a business data company.

Politicians on both the left and right are gleefully jumping on the proposal. Even Microsoft co-founder Bill Gates approves of action. Something is likely to happen, something big and destructive to the value of the internet companies that long ago passed IBM by.

But will that help IBM? Not likely.

The Bottom Line for International Business Machines

IBM has spent this year clearing the decks for Red Hat, selling off some software lines and even spinning off part of the Watson AI program (its former savior) to Centerbridge Partners, a private equity firm.

The new company is supposed to go toe-to-toe with Salesforce (NASDAQ:CRM), Oracle and Adobe (NASDAQ:ADBE). But the spinoff illustrates why investors are right to be skeptical of IBM itself going forward.

IBM is a dividend stock, currently paying $1.62 per quarter, yielding 4.6%. GAAP earnings for the last year were $9.51 per share. Keeping the earnings above the dividend, protecting the payout, is all people care about when they buy IBM stock today.

Watch to see if that changes.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and MSFT.

Article printed from InvestorPlace Media,

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