RALEIGH – What could be the final countdown for regulatory approval of the $34 billion acquisition of Red Hat by IBM reportedly will come Thursday from the European Union. Sometime after July 1, both companies say they expect the deal to close. And when the final papers are signed, many Red Hat employees who own stock in the Raleigh-based tech firm are going to be rich since IBM will immediately pay $190 in cash for each share.
So says Jim Verdonik, a veteran tech attorney who works on an average of two mergers and acquisitions a year, and NCSU economist Dr. Mike Walden.
Making them richer: Red Hat shares have increased more than 60 percent in value to a recent all-time high nearing the IBM offering price from around $116 when the deal was announced last October.
The consequences for the Triangle, where thousands of Red Hat’s some 13,000 employees live and work, will be immediate, says Walden who confirms that the IBM-Red Hat merger is the largest in North Carolina, barely edging past the Duke Energy-Progress Energy $32 billion marriage in 2012. (Ironically, Red Hat’s HQ is the old Progress HQ.)
New cars. New homes. Investments. Those with an entrepreneurial spirit starting new businesses. Paying off student loans. Maybe having dinner and adult beverages at their favorite bistro.
“Losing a corporate headquarters is a negative, but this is overwhelmed by the cash infusion,” Walden told WRAL TechWire.
“I would expect an uptick in entrepreneurial activity, which is the real engine of economic growth.
“So, overall, a plus for the region.”
No immediate close?
Verdonik, who recently launched the Innovate Capital Law along with partner Benji Jones after years at Ward and Smith PA and Daniels & Daniels & Verdonik where he worked with many tech firms, says he doesn’t expect the deal to close rapidly even with EU approval. The US Justice Department signed off on the deal in May, and Brazil followed suit earlier this week. IBM and Red Hat have been working to wrap up the merger since announcing it eight months ago.
“The big issue on timing is whether the EU antitrust regulators will place conditions on their approval,” Verdonik says.
“Complying with conditions may slow down the deal. Most commentators I have seen expect the deal to close sometime during the second half of this year. That tells us there is a lot of work to be done to close this deal.”
IBM and Red Hat execs won’t discuss the deal other than to say closing is expected in the second half of the year. The Hatters also filed a notice with the SEC on Tuesday about their annual meeting which will be cancelled if the merger closes before its scheduled date of Aug. 15.
If a closing occurs, Verdonik says many employees who aren’t locked into staying with Red Hat by terms of the deal or who have restricted stock options requiring them to remain with the merged company for a period of time before being allowed to sell shares will head for the exits.
“This is cash transaction. So, most employees who have vested stock will receive a check immediately upon the closing,” Verdonik explains.
“That will be a good time for local businesses who sell sports cars, vacations and beach houses.
“It will also be a good time for the IRS and state tax authorities.”
Many senior execs at Red Hat have millions of dollars locked up in shares and options worth millions more that have strings attached. So Verdonik doesn’t expect the executive suites in Downtown Raleigh to empty out.
Loyal work force
While determining how many Red Hat employees might become instant millionaires without having to win a lottery is not known, the number could be substantial. Red Hat’s workforce tends to be loyal and therefore have many years of service. They also, for the large part, are less buttoned down than IBMers, with Whitehurst among the leading business casual pacesetters.
Yet pay is good.
Software engineer salaries range from $88,934 to $142,173 according to employee-provided information at jobs website Glassdoor. Senior managers make around $160,000. Those figures don’t include ample benefits and the options of buying stock. Red Hat also offers a rewards program for good performers.
Are Hatters happy? Employees give Red Hat a 4.0 rating out of 5 and CEO Jim Whitehurst gets an “A” with a 95 out of 100 rating.
But as one employee noted at Glassdoor, there are concerns about how being absorbed into the IBM culture will work. IBM Chair and CEO Ginni Rometty has said from the day the deal was announced that Red Hat would operate independently and that Whitehurst would answer directly to her.
At the recent Red Hat Summit in Boston, she repeated the independence pledge, saying she didn’t have a “death wish.”
Whitehurst, meanwhile, has said perhaps somewhat tongue in cheek that preliminary merger meetings between teams from both companies have already created some friction.
Verdonik, however, doesn’t expect everything at Red Hat to go from red, white and black – its signature colors – to the IBM blue.
“With a big acquisition like this, employees probably won’t feel the effects on day to day working conditions for a long time,” Verdonik explains.
“A big ocean liner doesn’t usually make immediate 90-degree turns.”
But, like Walden, he expects there will be Red Hat employees heading to the exits as soon as they receive email or text alerts from their banks indicating the big stock payday has been deposited.
“Probably the biggest earliest impacts on employees will be that some employees will quit and enjoy their winnings,” he says. And there is a downside to that, at least for the short term.
“That might cause other employees to have to work harder to pick up the slack,” Verdonik warns.
The real challenge will come for many when the actual merger begins to take effect through integration of operations and cultures.
“Another effect is that employees may be going to more meetings about corporate culture and values and integrating with IBM,” Verdonik says. “There is a whole industry of consultants who make a living holding such meetings.”
The Triangle community has been through major mergers before that created fallout – from lost jobs to scientists, executives and entrepreneurs who struck out on their own. The birth of GlaxoSmithKline led to more than a few new companies, for example.
Will the Red Hat-IBM merger produce a sugar-based high of immediate gratification or a nutritional mix of new businesses adding to the region’s already vibrant economy?
“A big infusion of cash into the local economy like this will definitely be positive for the local economy in the short term,” Verdonik says
“Whether that impact lasts, depends on what Red Hat people decide to do.
“Are they rooted locally? Or will they move away?
“Will they start new companies? Or will they be passive investors?
“If they become investors, will they be angels who invest in local companies? Or will they invest in national and international markets?
“I suspect the answer is all of the above will occur. It will take awhile to find out what the mix is.”