IBM shares and bonds hit on $33bn Red Hat buy

IBM’s shares and bonds were hit yesterday after it confirmed its $33bn purchase of Red Hat – the world’s second-largest technology deal ever.

Shares were down 3pc in afternoon trading in New York, while the company’s euro-denominated bonds were having their worst day in three years.

The company’s shares are down around 20pc so far this year.

The Red Hat purchase is aimed at catapulting the company into the ranks of the top cloud software competitors. The cash deal, IBM’s biggest by far, boosts the 107-year-old computer-services giant’s credentials overnight in the fast-growing and lucrative cloud market and gives it much-needed potential for real revenue growth.

IBM, once synonymous with mainframe computing, has been slow to adopt cloud technologies and has had to play catch-up to market leaders Amazon and Microsoft.

“We’ve been reshaping IBM for this moment,” said CEO Ginni Rometty. “This is all about resetting the cloud landscape and this is the inflection point to do it.” IBM has been positioning itself as a leader in the so-called ‘hybrid cloud’ market – in which companies run programs on their own internal servers and the big ‘public’ cloud providers – Amazon’s AWS and Microsoft’s Azure – at the same time.

Red Hat, which sells soft- ware and services based on the open-source Linux operating system, helps companies bridge different platforms.

“Knowing first-hand how important open, hybrid cloud technologies are to helping businesses unlock value, we see the power of bringing these two companies together,” said JPMorgan chief Jamie Dimon.

IBM has seen revenue decline by almost a quarter since Ms Rometty took the CEO role in 2012 – mostly from declining sales in existing offerings. She has been trying to steer IBM toward the cloud, AI and security software with inconsistent results.

In its third-quarter earnings report, IBM disappointed investors who were seeking more progress. The Red Hat deal could signal that IBM wasn’t as well-positioned in cloud as it had been claiming, said Citigroup Research analyst Jim Suva. “We expect investor scepticism around the deal given IBM’s messaging that it is well underway in its transformation,” he said.

Investors have grown impatient as the stock slumped 31pc in the last five years. Warren Buffett virtually gave up on it last year with Berkshire Hathaway cutting its stake by 94pc, while increasing its stake in Apple. The Red Hat deal represents an admission by Ms Rometty that in-house growth wasn’t going to be enough to keep it from falling permanently behind.