RALEIGH – IBM and Red Hat have approval from the US Justice Department and the European Union to merge, but the path to a final closing remains strewn with rocks and hurdles as the tech giant and the up-and-coming tech power try to dot the last Is and cross the last Ts on a deal worth $34 billion.
Brazil’s revocation earlier this week of its regulatory approval for the deal only adds to the uncertainty around a deal announced last October and with an agreed-on deadline to close. (“The merger agreement allows for termination if the deal does not close by October 28, 2019,” notes attorney Jim Verdonik of Raleigh, a veteran tech lawyer and M&A veteran.)
So what is happening? Neither team will discuss the deal other than to say both expect closing in the second half of the year. That begins Monday, July 1. But they have acknowledged having meetings to discuss various aspects of the deal. IBM (NYSE: IBM) and Raleigh-based Red Hat (NYSE: RHT) have already agreed on terms, from $190 a share for RHT to employee retention agreements and more.
How will the companies function? Sell products? Will Red Hat remain separate as promised by IBM Chair and CEO Ginni Rometty?
Verdonik, cofounder of the Innovate Capital law firm in Raleigh along with Benji Jones, has been part of many M&As and IPOs over the last two decades-plus in the Triangle market. WRAL TechWire talked with him about what’s most likely to be taking place behind closed doors.
- So wht are IBM and Red Hat negotiators doing right now? More meetings? More planning for integration?
Yes, they can plan now, but implementing probably has to wait until after the closing.
- Why is the EU approval so important?
The European Union approval pf the Red Hat IBM merger was unconditional.
That is a big deal, because the EU has a history of using this approval process as an opportunity to force American companies to change business practices that allow American companies to be more competitive than EU based companies.
That did not happen in this case.
It means that the combined IBM-Red Hat product line will be more competitive than if the EU had placed constraints on what the combined company can do.
Is there any deadline pressure to get the deal done?
The merger agreement allows for termination if the deal does not close by October 28, 2019. So, technically, the closing could be months away.
However, it is likely that both companies will push to close as soon as possible now that the primary regulatory issues have been resolved.
It makes no sense to wait to bring the combined product line to the market. Also, if the closing is delayed, factors like stock market prices, trade wars, law suits and similar events could potentially interfere with the closing.
So why wait?
There are lots of things the two companies need to do to realize the commercial benefits of the merger. They have a lot more flexibility you do these things after the merger than they do while they remain separate companies.
Product pricing, bundling, distribution and joint sales are all limited by anti-trust laws until the merger closes.
Undoubtedly, these issues have been discussed at high management levels, but real implementation at the mid to lower levels of both companies can’t occur until the merger closes.
Although you never know from the outside how long it will take to close, the companies have a lot of incentive to close this merger in July rather than later.
After the merger closes, we will begin to find out whether the expected “synergies” can be realized or whether the synergies were just a pipedream.
There is a long history in mergers of expected synergies vanishing in the harsh reality of actually integrating two very large and very different companies.
People at both Red Hat and IBM have a lot of work ahead of them.
- What’s the deal with Brazil?
Please be aware that I know something about this area of the law, but I am far from an expert. My comments below are based on something I am good at, which is negotiating deals. I negotiate for a living.
Brazil seems to setting up a negotiation.
- Why now revoke approval?
I think the answer is that when the EU approved the merger without conditions, Brazil became more important, because Brazil then became the last impediment to closing.
If Brazil had disapproved before the EU approved the merger, it would have encouraged the EU to ask for concessions. Any concessions Red Hat and IBM made to the EU would have limited what they would give Brazil
- What’s the impact?
This is likely to slow down a closing until Red Hat and IBM develop a strategy for dealing with the Brazil market.
This is all about market clout.
Brazil isn’t as big as the US and EU markets, but its not a small market either.
I expect there will be a negotiation in which Brazil will negotiate some benefits for Brazilian companies. For examples, protections for Brazilian companies that distribute software for IBM or Red Hat. Or they may want a joint venture deal for a Brazilian software developer. Or they will want IBM Red Hat to commit to invest in Brazil.
These approval processes are often like a toll bridges. You have to pay to cross.
- Can Brazil halt the deal?
Brazil can’t stop the merger, because IBM and Red Hat are not incorporated in Brazil. It is, however, within Brazil’s power to make it difficult for Red Hat and IBM to do business in Brazil.
If Brazil tries to impose too high a price for approval Red Hat and IBM may decide to close the merger without approval and negotiate concessions after the merger.
Brazil also has to take into account that any Brazilian companies will be harmed if they are deprived of IBM and Red Hat products.
The bottom line is that Brazil cant be ignored, but Brazil can’t do anything it wants without suffering. That means we have all the ingredients necessary for a good negotiation.