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IBM Announces Acquisition of Red Hat

We are lowering our fair value estimate for the narrow-moat firm and think shares remain undervalued.

Oct 29, 2018

In terms of the financial aspects of the deal, we view a 63% premium as a bit high compared with recent software deals and above our $145 fair value estimate for narrow-moat Red Hat. The deal is expected to close in the second half of 2019, and we do not foresee any regulatory hurdles. Rumors suggest that IaaS leaders like Microsoft, Google, or Amazon may try to outbid IBM for Red Hat, but we suspect that Red Hat's Enterprise Linux (RHEL) operating system is best served under IBM’s mammoth services divisions.

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