After the hardware, software, and consulting company said it would buy cloud software startup HashiCorp and revealed first-quarter revenue that was less than analysts had anticipated, IBM shares fell as much as 9% in extended trading on Wednesday.
IBM said in a statement that it plans to acquire HashiCorp for $35 per share in cash. The purchase has an enterprise value of $6.4 billion, net of cash. Shares of HashiCorp increased on Tuesday following news from The Wall Street Journal that IBM was coming close to purchasing the company. IBM was aiming to offer $35 per share, according to a report from Bloomberg earlier on Wednesday.
In the first full year after closing, the acquisition would be accretive to adjusted earnings before interest, taxes, depreciation, and amortization; in the second year following closing, it would be accretive to free cash flow. According to IBM, the deal should finalize by the end of 2024. If the transaction closes, HashiCorp CEO Dave McJannet would answer to IBM senior vice president Rob Thomas, who oversees software, according to a spokeswoman.
HashiCorp would be a good addition to Red Hat, which has helped IBM’s revenue increase since the $34 billion purchase in 2019. IBM is now a neutral party that offers Red Hat’s Linux operating system for usage on several public clouds.
Developers rely on open-source software, which was pioneered by HashiCorp, to manage cloud infrastructure. HashiCorp has generated income via the sale of premium versions of many products, including the cloud-management program Terraform.
Shares of HashiCorp began trading on the Nasdaq in 2021. However, the corporation has continued to record losses and sales growth has halted. Even so, its sales growth is outpacing IBM’s.
On a conference call with analysts, IBM’s chief financial officer, Jim Kavanaugh, stated, “We see multiple drivers of product synergies within IBM and accelerating growth for HashiCorp.” Additionally, there are immediate cost synergies, according to Kavanaugh.
More clients should want to speak with IBM as a result of the merger, according to CEO Arvind Krishna.
In extended trading, shares of HashiCorp increased by 4% after the acquisition was announced.
This is IBM’s performance compared to the consensus of analysts surveyed by LSEG:
- Adjusted earnings per share was $1.68 as against the $1.60 anticipated.
- Revenue was $14.46 billion as against the anticipated $14.55 billion
A statement from IBM stated that the company’s revenue for the quarter climbed by about 1.5% year over year. In the last five quarters, this is the company’s third missed revenue opportunity.
Software revenue, at $5.90 billion, rose by around 6% but fell short of the $5.96 billion average estimated by StreetAccount’s panel of analysts. At constant currency, Red Hat’s revenue increased by 9% in the quarter.
IBM’s consulting revenue was $5.19 billion, which was just below than the $5.20 billion StreetAccount estimate.
According to Kavanaugh, “We saw both a lengthening of backlog duration driven by large scale digital transformations and a reduced level of revenue realization in the quarter as clients tighten discretionary spending.”
The overall income for infrastructure was $3.08 billion. Although it decreased by 0.7%, the amount exceeded the $2.94 billion StreetAccount estimate.
In order to increase efficiency, IBM said during the quarter that it was supplying artificial intelligence assistants to its 160,000 consultants. Additionally, the business successfully divested The Weather business to Francisco Partners.
Despite the move made during the after-hours, IBM shares have increased by almost 13% this year, outpacing the 6% increase in the S&P 500 index during the same period.
