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IBM passes hurdle in $34B Red Hat deal

IBM is one of the world's largest technology companies and it is betting heavily on its $34 billion purchase of open source software maker Red Hat.

International Business Machines (NYSE: IBM)  is one of the world’s largest technology companies with operations in over 175 countries. It is betting heavily that investments in cloud computing and artificial intelligence will offset slowing growth in its mainframe and consulting segments. IBM is hoping that its $34 billion offer for open source software firm Red Hat will lead it forward.

IBM moved up strongly in the first quarter before easing following the release of quarterly earnings. The shares are up 16.73% year-to-date.

First-quarter sales and profits were weaker than expected as demand for mainframes slowed and cloud initiatives, though strong, couldn’t take up the slack. Earnings were also hurt by a strong U.S. dollar. The strength of the greenback is a big deal for IBM as it gets 60% of revenue outside the U.S.

Revenue slipped 4.7% to $18.18 billion in the quarter ended March 31. Net income was 8% lower at $1.59 billion, excluding special items.

Better news was that in early May, the U.S. Justice Department approved the Red Hat acquisition. Red Hat users can make changes to its software under license and then resell it, which will help IBM expand its artificial intelligence (AI) and Blockchain initiatives.

IBM’s vast distribution and sales network gives Red Hat products new distribution channels. The EU is expected to give its decision on Red Hat by June 27.

Despite weaker earnings, IBM raised its dividend by five cents to $1.62 per common share in April, the 24th year in a row the dividend has increased. At current prices, the yields is 4.9%. IBM has a low P/E ratio of 10.1.

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This IBM update appeared in the June 10, 2019 issue of the Internet Wealth Builder.

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