‘Bet-the-Com­pa­ny Move’ by IBM Chief

L'Opinion - - The Wall Street Journal & L'Opinion - Jay Greene

With her $33 bil­lion deal for Red Hat Inc., Chief Exe­cu­tive Gin­ni Ro­met­ty is pla­cing the big­gest bet of her ca­reer on so­me­thing In­ter­na­tio­nal Bu­si­ness Ma­chines Corp. has ne­ver done: a mas­sive ac­qui­si­tion.

IBM is paying an amount for Red Hat that rough­ly equals the com­bi­ned va­lue of all the deals it has done in the past 15 years, as tra­cked by Dea­lo­gic. IBM said un­re­por­ted deals push the tal­ly of pre­vious ac­qui­si­tions hi­gher. The deal’s va­lue re­pre­sents about 30 % of IBM’s cur­rent stock-mar­ket ca­pi­ta­li­za­tion. IBM’s next big­gest deal was a $5 bil­lion pur­chase of Co­gnos Inc. in 2007.

For most of her near­ly se­ve­nyear te­nure as CEO, Ms. Ro­met­ty has tried to shake the rust off the aging tech giant with bets on emer­ging op­por­tu­ni­ties such as ar­ti­fi­cial in­tel­li­gence and the blo­ck­chain, some of which have yet to pay out. With the Red Hat deal, IBM is ma­king a si­gni­fi­cant gamble on a long­time pillar of its tur­na­round plans, the bu­si­ness of ren­ting out com­pu­ting po­wer and soft­ware in the cloud.

“This is a bet-the-com­pa­ny move by IBM,” said Matt McIl­wain, ma­na­ging di­rec­tor of Ma­dro­na Ven­ture Group LLC, a ven­ture firm that fo­cuses on cloud com­pu­ting. The firm isn’t an in­ves­tor in ei­ther IBM or Red Hat.

On Mon­day, the com­pa­nies said in a se­cu­ri­ties fi­ling that Red Hat would pay IBM a $975 mil­lion ter­mi­na­tion fee if the deal doesn’t close in a year.

Big ac­qui­si­tions have a long his­to­ry of not wor­king out. And there are rea­sons to be skep­ti­cal of IBM’s track re­cord, said Craig Lo­we­ry, an ana­lyst at Gart­ner Inc.

IBM paid rough­ly $2 bil­lion to buy SoftLayer Tech­no­lo­gies Inc. in 2013, ho­ping to make a dent in Ama­zon.com Inc.’s lea­der­ship in the mar­ket for ren­ting com­pu­ting po­wer and soft­ware, cal­led in­fra­struc­ture as a ser­vice.

But SoftLayer ne­ver be­came a ser­vice that threa­te­ned Ama­zon or others, or ser­ved as a plat­form from which IBM could si­gni­fi­cant­ly boost its other ap­pli­ca­tions, Mr. Lo­we­ry said.

“They’ve made a lot of deals,” he said. “None of them have been par­ti­cu­lar­ly suc­cess­ful.”

An IBM spo­kes­man dis­pu­ted that sen­ti­ment, no­ting the com­pa­ny has done well in­te­gra­ting ser­vices bu­si­nesses, such as with its $3.5 bil­lion ac­qui­si­tion of the con­sul­ting arm of Pri­ce­wa­te­rhou­seCoo­pers LLP in 2002.

One thing the Red Hat deal seems li­ke­ly to en­sure: Ms. Ro­met­ty’s conti­nued lea­der­ship at IBM, said To­ni Sac­co­na­ghi, an ana­lyst at San­ford C. Bern­stein. At 61 years old, Ms. Ro­met­ty is past the age when the pre­vious two IBM chiefs re­ti­red.

IBM and Red Hat ex­pect the deal to close in the se­cond half of next year, at which point it will take time to in­te­grate. “When you make your bed, you usual­ly have to lay in it,” Mr. Sac­co­na­ghi said.

Whe­ther or not suc­cess­ful, the deal li­ke­ly will pro­vide a boo­kend to Ms. Ro­met­ty’s conti­nuing struggle to breathe new life in­to the 107-year-old com­pa­ny. Her ef­forts to shrink IBM’s ol­der, slo­wer-growth lines of bu­si­ness while fo­cu­sing on what she re­fers to as high-va­lue bu­si­nesses re­main a work in pro­gress.

The Red Hat deal is ai­med at boos­ting IBM in the cloud, a key piece of those fast-gro­wing bu­si­nesses. Ama­zon do­mi­nates the mar­ket of pro­vi­ding com­pu­ting po­wer and soft­ware for rent with 51.8 % of world-wide re­ve­nue last year, ac­cor­ding to Gart­ner.

But Mi­cro­soft Corp., Ali­ba­ba Group Hol­ding Ltd. and Al­pha­bet Inc.’s Google have built big­ger bu­si­nesses there, and IBM gar­ne­red just 1.9 % of last year’s world-wide re­ve­nue in the mar­ket, ac­cor­ding to Gart­ner. The IBM spo­kes­man des­cri­bed Gart­ner’s de­fi­ni­tion of the mar­ket as “thin,” saying that cus­to­mers see the bu­si­ness more broad­ly.

Ms. Ro­met­ty’s bid to re­make IBM by fo­cu­sing on what it calls “stra­te­gic im­pe­ra­tives” – its col­lec­tion of fas­ter-gro­wing bu­si­nesses – led to near­ly six years of fal­ling re­ve­nue. IBM fi­nal­ly re­ver­sed that streak in Ja­nua­ry and ad­ded two more quar­ters of growth. But it slip­ped again, post­ing a 2.1 % slide in its la­test quar­ter. IBM’s shares are off 22 % since the be­gin­ning of the year and fell ano­ther 4.1 % to $119.64 in Mon­day tra­ding.

Ms. Ro­met­ty and IBM’s board “had to do so­me­thing that was rea­so­na­bly dra­ma­tic,” a for­mer IBM exe­cu­tive said of the deal.

The buil­ding of IBM’s stra­te­gic-im­pe­ra­tives bu­si­ness, which to­ta­led near­ly 50 % of the com­pa­ny’s re­ve­nue last quar­ter, set the com­pa­ny up well to ac­quire Red Hat, the IBM spo­kes­man said. “It’s not a des­pe­rate move,” he said.

SI­PA PRESS

Chief Exe­cu­tive Gin­ni Ro­met­ty has sought to shrink IBM’s ol­der, slo­wer-growth lines of bu­si­ness while fo­cu­sing on ar­ti­fi­cial in­tel­li­gence, the blo­ck­chain and the cloud.

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