IBM-Red Hat Deal Leaves Steep Premium as Merger Funds Stay Away

(Bloomberg) -- Investors are steering clear of betting on International Business Machines Corp.’s $33 billion takeover of Red Hat Inc., as the rich offer isn’t without risks.

Red Hat closed Monday at $169.63 despite IBM’s offer of $190. That represents a premium of about 12 percent, among the highest for North American deals, according to data complied by Bloomberg.

There are plenty of reasons for the spread, including concern of further sell-offs in the technology sector and the fact that the deal isn’t expected to close until the second half of 2019. If the deal falls apart and Red Hat accepts a competing offer, Red Hat will have to pay IBM a breakup fee of $975 million, according to a filing with the U.S. Securities and Exchange Commission. Red Hat, the maker of Linux operating system software, is also prohibited from soliciting other acquisition proposals.

“I’m not sure I want to start tying up capital in a deal that won’t be completed for possibly a year,” said Michael Samuels, an event-driven portfolio manager for Broome Street Capital.

One of the central concerns of traders who bet on mergers is whether approval could be held up in China amid a trade war with the Trump administration. Many were burned when Qualcomm Inc. failed to get approval earlier this year of its planned takeover of NXP Semiconductors NV. IBM attempted to ally such fears Monday when it said Chinese approval of the deal isn’t necessary.

“We do not see any regulatory inhibitors,” IBM Chief Executive Officer Ginni Rometty told investors on a conference call.

While the deal will get antitrust scrutiny in the U.S. and Europe, there’s little competitive overlap between the two companies. One area competition enforcers will probably look into is whether IBM will gain an incentive and the ability to raise prices for Red Hat’s services sold to IBM’s cloud-computing competitors like Amazon.com Inc. and Microsoft Corp.

The Red Hat deal is a move by IBM to position itself as a leader in the “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 software and services based on the open-source Linux operating system, helps companies bridge different platforms.

©2018 Bloomberg L.P.