Written by Sinad Karahimetovic
Evercore ISI analysts, led by Amit Daryanani, have considered the prospects IBM (NYSE: Trying to replicate the Red Hat deal that has proven successful despite its $34 billion price tag.
Darianani reminded investors that IBM has done more than 25 mergers and acquisitions in the past two years, worth more than $4 billion.
“We don’t find this surprising because acquisitions are part of IBM’s mid-term financial model (single-digit medium revenue growth in constant currency with M&A contributing 1-2 points to growth),” Darianani said in a note to clients.
However, IBM could still choose to do a major M&A deal to drive its higher growth, as well as try to fundamentally transform its business. In this regard, the company can allocate up to 30 billion dollars to the right deal, although management indicated that this figure could be closer to 20 billion dollars.
“High-growth technology companies have re-rated their ratings lower since the beginning of the year; with valuation multiples increasing in attractiveness compared to last year, we think it might make sense for IBM to look away from mergers and acquisitions to drive revenue acceleration and/or further transform their business. Given the success of the RHT acquisition, we believe investors can view a potentially large transformational deal positively.”
The Evercore ISI screen for public market companies that could be acquired by IBM generated about 80 results. For example, companies like Zscaler (NASDAQ :), Okta (NASDAQ :), DocuSign (NASDAQ :), RingCentral (NYSE :), MongoDB (NASDAQ 🙂 and Jetlab (NASDAQ :), they all found themselves on the list of potential IBM mergers and acquisitions targets.