RALEIGH – Is Red Hat on the shopping list for Google? Could be. But the cost would not be cheap with Red Hat’s stock having nearly doubled in price over the past year. A takeover would likely cost more than $30 billion and spark a bidding war. At that price a deal would rank among the most expensive ever in tech.
A top executive for the cloud behemoth tells Bloomberg News that Google is “constantly on the lookout for a major acquisition.” Growing Google’s cloud business is the responsibility of Diane Greene as chief executive of Google Cloud. And Raleigh-based Red Hat (NYSE: RHT) is a cloud player, providing technology services and support for a growing number of clients. In fact, CNBC’s Jim Cramer just days ago cited Red Hat as one of his “cloud kings.”
Also, one investor in VMware has suggested Red Hat as a possible takeover target among rumors that Dell (which owns most of VMware’s stock) is mulling a deal to take his namesake firm public again through a reverse merger with VMware.
[Update: The news had little impact on Red Hat stock Monday. Shares actually tumbled late in the day to close down $2.06 at $152.11. The fall came even as analyst firm Barclays raised its price target for Red Hat shares to $165 from $145, citing what Investor’s Business Daily labeled as “growing cloud-computing clout.”]
If Google is serious about Red Hat, then would other players such as Amazon or even Microsoft (the dreaded Darth Vader of the Red Hat world dating back to Bill Gates and his contempt for open source) enter into a bidding war? After all, Red Hat works with both giants. And what about IBM, which wants to grow its cloud business and is another Red Hat collaborator?
Why might Google be thinking of making a play for Red Hat, which launched in 1993 and now has more than 10,000 employees? Because of competition in the cloud where Amazon Web Services is dominant followed by Microsoft.
“Now she’s prepared to make a big purchase to catch market leaders Amazon.com Inc. and Microsoft Corp.,” Bloomberg says, adding the caveat “if the deal fits.”
In view of Google’s cloud aspirations, Bloomberg News mentioned Red Hat.
“When asked, she confirmed that bankers have floated much larger deals for enterprise firms including Red Hat and ServiceNow,” Bloomberg reported. “She declined to say what she thought of those ideas.”
Red Hat, which reports earnings on March 26, told the news service it had no comment. ServiceNow didn’t “immediately respond to a request for comment.”
Financial news sites were relatively quiet about the Bloomberg report over the weekend.
“We’re constantly on the lookout for a major acquisition,” Greene said. “But, you know, it’s hard to find one that makes sense.”
A lot of cents
Would buying Red Hat make sense for Google? Make that “cents” – a lost of them.
The Hatters, who are best known as developers of open source Linux software and services such as Red Hat Enterprise Linux (widely used on Wall Street) would not come cheaply.
Red Hat shares have nearly doubled in value over the past year, soaring to a high of $155.47 on March 9 from $81.31 as of March 21 2017.
The company is very profitable with annual revenues likely to top $3 billion for fiscal year 2018. It is sitting on some $1.5 billion in cash and equivalents and has less than $1 billion in debt.
The cost of a takeover would mean Google targeting a company with a market cap of $27.29 billion based on Friday’s closing share price of $154.17.
Add on what’s called a “premium,” a bid for Red Hat would boost the per-share takeover price another 10 percent or more. And if other tech giants want in on the deal, the price could sizzle.
At around $30 billion, a Red Hat buy would crack the list for top 10 biggest tech deals – ever.
Wall Street analysts already value the stock highly. Of 29 that follow Red Hat, seven list RHT as a “strong buy” and 13 others as a “buy.” Eight recommend it as a hold. Only one lists Red Hat as a “sell.”
So all the positive views and upward drive in share price might price Red Hat out of what Greene feels is reasonable.
“I don’t want to do something unless it’s in line with our strategy,” she told Bloomberg. “Also if you’re pretty sure you make it successful and it’s reasonably priced.”
Red Hat at its peak?
One possible negative for Red Hat – and perhaps a reason to consider a takeover – is: Just how much higher can the price of its stock go?
Abhey Lamba, an analyst at research firm Mizuho, downgraded Red Hat to “neutral” from “buy” on March 12, citing concerns about Red Hat’s growth.
“We think mid-to-high teens top-line growth can continue on share gains for [Red Hat] and attach on the emerging technologies portfolio. That said, we believe organic and inorganic investments will likely continue given the pace of innovation in the infrastructure space, which would limit margin gains,” Lamba wrote in a research note as cited by financial news site Bezinga.
An example: Red Hat spent $250 million to acquire CoreOS in a move to improve its cloud storage and related technology on Jan. 31.
For more from Bloomberg, read the full story online.
For more about the VMware angle, read the eWeek report online.