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How Will IBM Finance Its Red Hat Deal?

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IBM is paying a 63% premium

IBM (IBM) is acquiring open-source software leader Red Hat (RHT) for $34 billion, which represents a 63% premium to Red Hat’s closing price the day before the deal was made public.

IBM intends to finance its acquisition of Red Hat using some of its cash hoard and a bridge loan. The company finished the third quarter with $14.7 billion in cash, part of which is expected to be spent on meeting part of the cost of the Red Hat acquisition. For the loan, IBM has lined up a $20 billion bridge loan to be provided by Wall Street lenders JPMorgan Chase and Goldman Sachs.

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A top bridge loan borrower

The loan is expected to place IBM among America’s top bridge loan borrowers, according to LPC data cited by Reuters. Verizon (VZ) is currently at the top with the largest US bridge loan of $61 billion, which it arranged to finance its $130 billion deal to purchase Vodafone’s (VOD) stake in Verizon Wireless in 2013. The Walt Disney Company (DIS) has also arranged a $35.7 billion bridge loan to finance its purchase of the majority of 21st Century Fox’s (FOXA) entertainment assets.

IBM pursues growth, not cost cuts

IBM CEO Ginni Rometty has said the company’s decision to acquire Red Hat is more about growth synergies than cost synergies. IBM’s revenue fell 2.1% YoY (year-over-year) to $18.8 billion in the third quarter. 

The acquisition of Red Hat is expected to bolster IBM’s competition in the cloud computing market, where it currently trails Amazon and Microsoft in terms of market share. IBM’s cloud revenue fell 1.9% YoY in the third quarter.

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