On Sunday, cloud computing giant International Business Machines (NYSE:IBM) announced it has agreed to buy cloud computing competitor Red Hat Inc. (NYSE:RHT) for more than $33 billion, making this acquisition the largest in the tech company's history.
The reasons underpinning this acquisition are many - IBM has struggled to maintain its market position against major competitors such as Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc. (NASDAQ:GOOG), and this acquisition will allow IBM to grow revenues from its cloud segment at a much faster pace, allowing the company to add to its competency in this space and grow its influence in this segment relative to its competitors.
What the market may not appreciate on Monday, however, is the size of the deal relative to Friday's closing price. IBM has reportedly agreed to pay a 63% premium over and above Red Hat's Friday close, meaning investors are likely to question just how accretive this deal will be to IBM over the long run and whether any value or synergy from this marriage has already been digested in the deal.
This is clearly a strategic move for IBM to bolster its competitive position in this space, and while the deal may have needed to have been made, it may be concerning to some that IBM will be forced to pay these premiums moving forward to make deals happen.
Invest wisely, my friends.
