IBM shares slipped as much as 9% in extended trading Wednesday after the hardware, software and consulting provider said it would acquire cloud software maker HashiCorp and reported first-quarter revenue that was lower than analysts had predicted.
In a statement, IBM announced that it intends to pay $35 per share in cash for HashiCorp in a deal with a $6.4 billion enterprise value, net of cash. On Tuesday, The Wall Street Journal reported that IBM was getting close to acquiring HashiCorp, sending shares upward. Bloomberg said earlier on Wednesday that IBM was looking to offer $35 per share.
The deal would be accretive to adjusted earnings before interest, taxes, depreciation and amortization in the first full year after close, and accretive to free cash flow in the second year after close. IBM said it expects the transaction to close by the end of 2024. Dave McJannet, HashiCorp’s CEO, will report to Rob Thomas, IBM’s senior vice president in charge of software, if the deal goes through, a spokesperson said.
HashiCorp would complement Red Hat, which has contributed to IBM’s revenue growth since the $34 billion acquisition in 2019. IBM now sells Red Hat’s version of the Linux operating system for use on multiple public clouds, making it a neutral entity.
HashiCorp pioneered open-source software that developers rely on to control cloud infrastructure. Premium versions of the Terraform cloud-management software and other products have brought revenue to HashiCorp.
In 2021 HashiCorp shares started trading on the Nasdaq. But revenue growth has slowed, and the company has continued to report losses. Still, it’s adding revenue at a faster pace than IBM.
“We see multiple drivers of product synergies within IBM and accelerating growth for HashiCorp,” Jim Kavanaugh, IBM’s finance chief, said on a conference call with analysts. There are short-term cost synergies as well, Kavanaugh said.
The combination should result in more clients wanting to talk to IBM, CEO Arvind Krishna said.
HashiCorp shares moved 4% higher in extended trading following the acquisition announcement.
Here’s how IBM did in comparison with the consensus among analysts polled by LSEG:
- Earnings per share: $1.68 adjusted vs. $1.60 expected
- Revenue: $14.46 billion vs. $14.55 billion expected
IBM’s revenue increased around 1.5% year over year during the quarter, according to a statement. This marks the company’s third revenue miss in the last five quarters.
Revenue from software, at $5.90 billion, increased about 6% and was below the $5.96 billion consensus among analysts surveyed by StreetAccount. Red Hat revenue grew 9% during the quarter at constant currency.
IBM’s consulting revenue came in at $5.19 billion, down slightly and just under the $5.20 billion StreetAccount consensus.
“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,” Kavanaugh said.
Infrastructure revenue totaled $3.08 billion. It declined 0.7% but came in higher than the StreetAccount consensus of $2.94 billion.
During the quarter, IBM said it was providing its 160,000 consultants with artificial intelligence assistants to boost productivity, and the company completed the divestiture of The Weather Company to Francisco Partners.
Notwithstanding the after-hours move, IBM shares are up about 13% so far this year, outperforming the S&P 500 index, which is up 6% over the same period.
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