At the end of October, IBM announced it was paying $34 billion for the software company Red Hat based in Raleigh, North Carolina. An article by Liana Baker and Greg Roumeliotis of Reuters, IBM’s reason for the purchase was to diversify its technology hardware and consulting business into higher margin products and services.
IBM faces slowing software sales and less demand for its mainframe servers, with the purchase of Red Hat IBM will become the world’s No 1 hybrid cloud provider.
Red Hat uses Linux which is an alternative to software made by Microsoft. Red Hat charges fees to corporate customers for custom features, maintenance and support. The purchase also shows how older companies such as IBM are turning to deal making to gain scale to fend off competition in cloud computing. The competition in cloud computing are Amazon, Alphabet and Microsoft.
To pay for the purchase, IBM will not purchase back shares in 2020 and 2021.
Linking to dividend paying stocks, one of the reasons dividend paying companies remain dividend paying is profits allow companies to buy successful companies with high margins or are profitable. As long as the subsidiary remains profitable, it adds to the company and the larger company folds it into the many products and services it offers.
There are more questions than answers, till the next time – to raising questions.