IBM debt rating cut with Red Hat on board
S&P GLOBAL Ratings on Monday downgraded IBM’s debt following the massive acquisition of cloud computing firm Red Hat for a staggering $34 billion in cash.
But Red Hat is likely to see its rating improve by two notches after the deal is completed, S&P said in a separate statement.
S &P sa id t he t ra nsact ion would increase IBM’s debt level, prompting it to cut the firm’s credit rating to A from A+ but also to lower the outlook to negative due to the rising indebtedness.
“The rating downgrade ref lects prospective changes in IBM’s debt leverage,” S&P said in a statement. “IBM will issue substa nt ia l debt to f und t he acquisition of Red Hat.”
The computing giant could face another downgrade if it underperforms the expected low single-digit growth in revenues.
S&P said it has changed the outlook on Red Hat’s debt rating to “positive,” and expects to raise the grade to “A” once the deal closes in late 2019, the same as IBM.
Despite the IBM downgrade, the ratings agency said the merger, which is subject to approval of Red Hat shareholders and some regulatory approval, would help IBM compete and generate a new revenue stream.
S&P said the acquisition would help “IBM by add i ng Red Hat’s st rong re c u r r i ng revenue f rom it s open sou rce sof t ware subscr ipt ions. We a lso expect t hat t he acquisition will strengt hen IBM’s position in hybrid cloud solutions and enhance oppor- tunities for cross-selling goods and ser v ices.”
IBM announced the deal on Sunday to buy Red Hat, making it among the biggest tech mergers in history.
‘Game changer’
If approved it will be the third-biggest tech merger in history, according to business news site CNBC. Red Hat said it was the biggest involving a software company.
The deal will see IBM acquire all of the issued and outstanding common shares of Red Hat for $190.00 a share in cash, more than $70 above the trading price at the close of business on Friday.
Ginni Rometty, IBM’s chairman, president and CEO, called the merger “a game-changer.”
“IBM will become the world’s number one hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.”
Cloud computing refers to the delivery of computing services, including storage and software, over the internet to achieve economies of scale.
Hybrid cloud relates to the linking of public and private cloud platforms.
Rometty added that most companies are currently being held back in their cloud transformation due to closed platforms.
Once known primarily for its computer hardware, IBM has made cloud computing a priority in its growth strategy, like Amazon and Microsoft did earlier.