(Photo credit: Sankarshan)
First of all, we have to get the context for this transaction. IBM (IBM) proposed taking over Red Hat (RHT) in a $30 billion deal. There are some specifics that must be covered. One of the most important is the fact that this is a friendly deal, i.e., the acquired management team is on board with the transaction. Jim Whitehurst and his team are actively pursuing the deal and bearing in mind the insiders positions, they have good monetary reasons to do so.
Table 1 – Top direct holders
(Source: Guru Focus)
Another interesting point is the huge premium. During the last two years, Red Hat has been trading between $69.70 and $174.99. The average closing price was around $116, which is remarkably close to the closing price the day before the offer.
Graph 1 – 2-year stock price for Red Hat
(Source: Yahoo Finance)
Finally, taking a look at the deal conference call, we can see that IBM is really betting the ranch on this deal. They seem to believe that Red Hat’s cloud expertise and technology will help them to reignite growth.
Summing up, we should retain that most of the decision makers are aligned with the deal. Both management teams want it while the shareholders will have a nice premium if it goes through. We only lack regulators’ approval to have everyone onboard.
Whole Food Markets and Amazon as a proxy for IBM and Red Hat
The Whole Foods acquisition serves as a good proxy because it was also supported by both management teams. So, let’s see what happened.
After the announcement of the Whole Food Market acquisition by Amazon (AMZN), the Whole Foods stock price shot up, to around the acquisition price, $42 per share.
Graph 1 – Whole Foods Market before and after Amazon Acquisition offer
(Source: Barchart.com)
Basically, the market assumed a near 100% chance of success. In the first few days, it even reflected a possible competing bidder. But, by then, Amazon used its traditional tactics to avoid getting into a contest.
