IBM Stops Buybacks to Pay for Red Hat
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IBM Stops Buybacks to Pay for Red Hat
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Re: IBM Stops Buybacks to Pay for Red Hat
#2Learning RHEL now :)
Re: IBM Stops Buybacks to Pay for Red Hat
#3Interesting. This seems like a big bet for IBM given that they used over 70% of their cash pile to buy Redhat.
That said the picture painted by this article is that doing nothing wasn't an option, declining revenues is not a good picture at a time when the competition are posting record numbers...
Re: IBM Stops Buybacks to Pay for Red Hat
#4Can someone explain why Red Hat is so valuable? Why would IBM put such a big bet?
Re: IBM Stops Buybacks to Pay for Red Hat
#5What laypeople need to realize is the following relation:
Low federal funds rates allow companies to acquire huge amounts of debt very cheaply.
Huge amounts of cheap debt allow companies to buy lots of stock, driving up prices.
Stock prices inflated in such a way are not supported by fundamentals and so the downside risk greatly increases.
Once the downside eventually materializes, markets drop violently. At first, the FED ignores this, but eventually it bails. The funds rate is once again lowered, so the game can continue.
In any event, the game must continue, because companies need new debt to service old debt. If the new debt was more expensive, the companies would eventually risk defaulting.
To understand the risk of corporate defaults, one must look at the importance of corporate bonds in pension funds. Ironically, the low federal funds rate is part of what drives pension funds to purchase more risky corporate debt, in order to meet their yield requirements.
All of this causes massive asset price inflation. Stock prices are detached from actual revenue, real estate prices are detached from rent income. The rich are getting richer - at least on paper - because they own most of the assets.
The CPI doesn't immediately reflect this kind of inflation, so the FED gets to claim "there is no inflation" and everything is "just fine". Well, it's not fine and they know it, they just can't really do anything about it.
Re: IBM Stops Buybacks to Pay for Red Hat
#6Can someone explain why Red Hat is so valuable? Why would IBM put such a big bet?
The general strategy seems to be: IBM's customers have been slowly transitioning from proprietary IBM OSs (AIX, z/OS) to Linux for a lot of their workloads, and IBM has accommodated this out of necessity, but wants to retain licensing revenue and some degree of branding/control in that situation by having such customers on an Enterprise IBM Linux. RHEL more or less already owned the Enterprise Linux space, so IBM just bought them instead of developing something in-house. Along with IBM getting an Enterprise Linux brand out of it, they also seem to be hoping some RHEL customers who aren't otherwise IBM customers might be converted to buy more stuff (e.g. maybe some of them can be sold on RHEL/POWER9 servers).
(Whether that justifies the valuation I don't know enough to guess on.)
Re: IBM Stops Buybacks to Pay for Red Hat
#7Can someone explain why Red Hat is so valuable? Why would IBM put such a big bet?
My thoughts are because IBM can see the metrics about where the Unix/Linux market is heading, especially in the age of the cloud. The hyperscale clouds are all running various Linux distributions, not AIX. FWIW my experience is showing large enterprises putting their Unix environments on life support/maintenance only mode, and not expanding their Unix usage.
Seems like IBM is hedging their future on Linux.
Re: IBM Stops Buybacks to Pay for Red Hat
#8Can someone explain why Red Hat is so valuable? Why would IBM put such a big bet?
> Can someone explain why Red Hat is so valuable?
The better question is, why did it cost so much? First of all, Red Hat makes a lot of money and it has a solid market position.
Secondly, you tend to overpay in an acquisition, because it is a huge amount of sudden demand.
Lastly, pretty much all stock is "overvalued" right now, because money is cheap (see my other comment).
> Why would IBM put such a big bet?
Because it is a giant corporate monstrosity that cannot really innovate by itself anymore. It still can buy things though.
Re: IBM Stops Buybacks to Pay for Red Hat
#9What laypeople need to realize is the following relation: Low federal funds rates allow companies to acquire huge amounts of debt very cheaply. Huge amounts of cheap debt allow companies to buy lots of stock, driving up prices. Stock prices inflated in such a way are not supported by fundamentals and so the downside risk greatly increases. Once the downside eventually materializes, markets drop violently. At first, t…
It's hard for me to see why this dynamic would happen. What specific federal funds rate would make stock prices "supported by fundamentals" rather than "inflated", and why in your view can't the Fed just set that rate to avoid these problems?
Re: IBM Stops Buybacks to Pay for Red Hat
#10What laypeople need to realize is the following relation: Low federal funds rates allow companies to acquire huge amounts of debt very cheaply. Huge amounts of cheap debt allow companies to buy lots of stock, driving up prices. Stock prices inflated in such a way are not supported by fundamentals and so the downside risk greatly increases. Once the downside eventually materializes, markets drop violently. At first, t…
Absolutely spot on. Banks love inflation because it allows them to arbitrage between the CPI and the rest of the economy. Also the higher inflation, the more valuable a bank's services become.