
IBM Stops Buybacks to Pay for Red Hat - mathattack
https://investorplace.com/2019/08/ibm-stops-buybacks-to-pay-for-red-hat/
======
mathattack
A dying company trying to extend their “squeeze your base” policy to another
vendor. I think they overpaid for RedHat. After a particularly painful audit
at my Fortune 500, we kicked out RedHat. We spend more time talking to IBMs
auditors than we do to their Salespeople and engineers. This merger seems like
the modern version of HP and Compaq. The only winners are the shareholders who
bolt early. Customers, employees and late shareholders are all losers.

~~~
riffraff
Forgive my ignorance,but what is an IBM auditor?

~~~
josh_fyi
IBM products have no license-checking built in, on purpose. They _want_ you to
make more copies than your negotiated license agreement allows. Then, when the
auditor comes in, they charge you the sky-high list price, backdating it as
well.

~~~
jjeaff
I have some employees in India and apparently, Adobe does this there. They
will just randomly show up and ask to look at all your systems and see if you
are using pirated Adobe products.

I have no idea what the laws are there, but the companies they show up at
don't even necessarily have any license with Adobe. I can't imagine that is
legal in India, but apparently it happens unabetted.

~~~
acomjean
welcome to licensing by companies in the Business Software Aliance:

notorious for using disgruntled former employees for starting audits. (they
did to my friends company a decade ago and found nothing..)

[https://en.wikipedia.org/wiki/BSA_(The_Software_Alliance)](https://en.wikipedia.org/wiki/BSA_\(The_Software_Alliance\))

lots of major companies: (apple/adobe....)

[https://www.bsa.org/membership](https://www.bsa.org/membership)

~~~
delfinom
The trick? They tell to fuck off and file a lawsuit if they want to audit.
They back off. Unless the former employee has actual proof other than a
statement they won't bother.

~~~
pjmlp
That trick does not work in countries where they come along with the police
department responsible for checking if business activities are in accordance
with the law.

Here is the Portuguese variant of such police department.

[https://www.asae.gov.pt/cooperacao-nacional-e-
internacional/...](https://www.asae.gov.pt/cooperacao-nacional-e-
internacional/cooperacao-internacional-/relacoes-bilaterais/cooperacao-
institucional--paises-e-territorios-de-lingua-oficial-portuguesa/igae-
inspecao-geral-das-atividades-economicas.aspx)

------
tonyedgecombe
The big risk is that IBM drags Redhat down to their level. This wouldn't be
unusual, most takeovers fail to deliver shareholder value.

~~~
streetcat1
There is nothing to drag. A single server distro is becoming irrelevant as the
unit of computation resources is the kubernetes cluster. I.e. all the app see
is a set of kubernetes nodes, it does not really care what server disto you
are running on.

~~~
orev
You do realize that those containers eventually need to be hosted _somewhere_
, right? That somewhere is a server running an operating system. Containers
are more a threat to virtual machine OSes than ones that host containers.

~~~
koolba
But the hosts no longer need the full distro stack traditionally provided by a
RHEL. Just a thin enough veneer for a container runtime with live kernel
updates.

Maybe there’s a market for intra container licenses but it’s a harder sell as
even there the goal is to go slim.

~~~
temac
So you remove all the traditional services from the OS "definition", and roll
your owns (in _one_ particular context). Don't worry, soon enough some people
will be tired of reinventing the wheel each in their own corner, and what you
call "a market for intra container licenses" (potentially in the form of free
commoditized open-source licensed components -- but that is not really new for
that comparison, because truly free open-source distro already exist; you
don't _have_ to use RHEL) will exist, simply because it makes absolutely no
economical sense that everybody redevelops or even just manages everything all
the time.

~~~
ethbro
"ReDevelOps" is an accurate buzzword for a lot of the market these days.

------
gridlockd
What laypeople need to realize is the following relation:

Low federal funds rates allow companies to acquire huge amounts of debt very
cheaply.

Huge amounts of cheap debt allow companies to buy lots of stock, driving up
prices.

Stock prices inflated in such a way are not supported by fundamentals and so
the downside risk greatly increases.

Once the downside eventually materializes, markets drop violently. At first,
the FED ignores this, but eventually it bails. The funds rate is once again
lowered, so the game can continue.

In any event, the game _must_ continue, because companies need new debt to
service old debt. If the new debt was more expensive, the companies would
eventually risk defaulting.

To understand the risk of corporate defaults, one must look at the importance
of corporate bonds in pension funds. Ironically, the low federal funds rate is
part of what drives pension funds to purchase more risky corporate debt, in
order to meet their yield requirements.

All of this causes massive asset price inflation. Stock prices are detached
from actual revenue, real estate prices are detached from rent income. The
rich are getting richer - at least on paper - because they own most of the
assets.

The CPI doesn't immediately reflect this kind of inflation, so the FED gets to
claim "there is no inflation" and everything is "just fine". Well, it's not
fine and they know it, they just can't really do anything about it.

~~~
criddell
Are there buyback limits? Is it possible that company could buy all of it's
stock?

~~~
mrep
Nope, remember, share buybacks are just a more tax efficient form of returning
profits to investors than dividends. As they buy more and more of their stock,
the remaining shareholders end up owning a larger and larger percentage share
of the company.

Taken to the extreme, there would finally be 1 share left held by someone and
thus that person would own 100% of the company and be entitled to 100% of the
profits from said company. The company cannot just buy the last stock because
the stock itself is worth all the cash the company holds and the future
profits it will make. Saving up more cash to buy the final stock just raises
the price because the stock is entitled to that cash and nobody is going to
loan a company enough cash to be worth the expected future profits of said
company which makes up the remainder of the shares value.

Funnily enough though, I think they would still do share buybacks by first
splitting the stock and then buying a subset of the split stock because then
the sole owner would only have to pay taxes on the sale price minus the price
he paid for the stock whereas dividends are taxed in their entirety.

~~~
criddell
> The company cannot cannot just buy the last stock because the stock itself
> is worth all the cash the company holds and the future profits it will make.

The last share is worth whatever the person that holds it is willing to sell
it for, right? A share of IBM is worth $136 right now because there are two
parties willing to buy/sell a share of IBM at that price.

I realize this would never happen in a million years, but could a company
exist that is owned by nobody?

~~~
guan
It would cause some practical difficulties if the corporation owned all its
shares. For example, in the case of a Delaware corporation, shares owned by
the corporation itself can’t vote, so it would not be possible to elect board
members. Some jurisdictions might have legal limits on how much stock can be
bought back as a percentage of the outstanding shares.

It’s not that unusual to have entities that essentially own themselves, in the
sense that nobody is entitled to the profits and the board or managers elect
their own successors. This is the case for foundations and trusts in many
countries, usually with some kind of charitable purpose. Some of them even
operate businesses. It might be possible for a company to take on some debt,
buy out all its shareholders, and reorganize into a charity.

------
raesene9
Interesting. This seems like a big bet for IBM given that they used over 70%
of their cash pile to buy Redhat.

That said the picture painted by this article is that doing nothing wasn't an
option, declining revenues is not a good picture at a time when the
competition are posting record numbers...

~~~
hodgesrm
> If all goes according to plan, IBM forecasts a sales bump of 2% over the
> next 5 years, but it will take 2 years before Red Hat contributes to
> earnings.

These are not good projections. It's really hard to understand how RedHat
acquisition makes any financial sense whatsoever if this is the actual effect.
RH annual revenues were $3.36B for FY2019. [1] That's a tiny fraction of IBM's
current revenue.

[1] [https://investors.redhat.com/news-and-events/press-
releases/...](https://investors.redhat.com/news-and-events/press-
releases/2019/03-25-2019-201454520)

------
mrtksn
Can someone explain why Red Hat is so valuable? Why would IBM put such a big
bet?

~~~
_delirium
The general strategy seems to be: IBM's customers have been slowly
transitioning from proprietary IBM OSs (AIX, z/OS) to Linux for a lot of their
workloads, and IBM has accommodated this out of necessity, but wants to retain
licensing revenue and some degree of branding/control in that situation by
having such customers on an Enterprise IBM Linux. RHEL more or less already
owned the Enterprise Linux space, so IBM just bought them instead of
developing something in-house. Along with IBM getting an Enterprise Linux
brand out of it, they also seem to be hoping some RHEL customers who aren't
otherwise IBM customers might be converted to buy more stuff (e.g. maybe some
of them can be sold on RHEL/POWER9 servers).

(Whether that justifies the valuation I don't know enough to guess on.)

~~~
goatinaboat
_IBM 's customers have been slowly transitioning from proprietary IBM OSs
(AIX, z/OS) to Linux for a lot of their workloads_

Yes, but that’s only a coincidence. What they have really been doing is
transitioning from proprietary to commodity hardware. Which IBM no longer
makes. Where does IBM make money? Mainframe sales. There can be only one
winner here... IBM will need to kill off their mainframe business to justify
this purchase, something they have proved very reluctant to do.

~~~
josho
There is no reason to discontinue their mainframe business. Banks and other
institutions have applications running successfully on those platforms. The
industry has learned that it is better to integrate applications than to
replace—especially when the replacement is a 40 year old app that runs the
business.

IBM’s mainframe margins are safe for decades to come.

~~~
goatinaboat
But, don’t you see the paradox there? If customers are happy with their
mainframe why would they switch to Red Hat? And if they don’t want to switch
why did IBM buy it?

~~~
snuxoll
They may not want to get rid of the hardware, but they may want to run
something other than z/OS on it. RHEL is well supported on both IBM midrange
and mainframe systemd.

------
bluedino
So when IBM is desperate for cash in a few years, who buys Red Hat?

Microsoft? Tencent? Dell? _gulp_ Oracle?

~~~
zepearl
What about "Suse"? (
[https://en.wikipedia.org/wiki/SUSE](https://en.wikipedia.org/wiki/SUSE) )

I understood that it's often used in corporations as an alternative for RedHat
=> maybe Suse will have to merge as well with some other company if the combo
RedHat&IBM in/directly shrink their revenues?

E.g. maybe Suse will be excluded from IBM's support? (
[https://www.suse.com/partners/alliance/ibm/](https://www.suse.com/partners/alliance/ibm/)
)

------
H8crilA
PSA: If you want exposure in your portfolio to the M&A market there's an ETF
that does it:

[https://www.etf.com/MNA](https://www.etf.com/MNA)

It's perhaps the single biggest "alternative" strategy ETF.

~~~
downrightmike
YTD isn't even 1%, almost anything else has done better.

~~~
mruts
I mean SPY has returned like 3% YTD. But that’s not really the point. M&A has
zero to very low Beta exposure, so it’s almost completely uncorrelated to the
market. This, in general, is a good thing.

A lot of quant market neutral hedge funds only return 3-5% per year. Compared
to the S&P, this looks pretty bad. But the goal of these funds isn’t to
provide the best returns, it is to provide the best risk adjusted returns. You
may ask, why would I care about that?

The answer is that you can synthetically match any return by either buying or
selling (borrowing) at the risk free rate. So if I had a fund that had returns
of 4% and volatility of 2%, I could turn it into 2 and 1, 8 and 2, or 16 and
4, or whatever.

------
Rapzid
> On July 9, IBM closed on its $34 billion purchase of Red Hat, a Linux
> software operating system mainly used by cloud operators.

Completely conflates Red Hat with RHEL and makes it sound like IBM purchased a
linux distro for 34b.

------
RickJWagner
" leaving it with only $12 billion in cash." " But IBM’s dividend was hiked
only 3.2% this year"

Sounds like a first-world financial scenario, no?

------
mkhalil
I remember when 3x yearly revenue was the proper purchase price for a an
established business like this. 10x huh? Glad, I am not in IBM. But wish the
best of luck

------
strenholme
I miss the old IBM Thinkpads; sure, they cost $4,000 during the height of the
dot-com boom, but those things were built like tanks. I got a 600X when a dot-
com was liquidating its assets for $700 and it was my primary computer for
over six years.

The newer Thinkpads from Lenovo are more like wannabe Macbooks; I miss
batteries you could swap out without opening the computer and Thinkpads you
could open without using a spudger.

~~~
notatoad
lol what does that have to do with anything?

~~~
Foober223
Do you even thinkpad bro?

------
mikhailfranco
Debt should not be a tax deductible expense.

Simple.

------
OrgNet
What does that mean for Fedora?

------
broknbottle
IBM missed a great marketing opportunity. They should have told the public
that the decision to acquire Red Hat was made by Watson

~~~
acdha
Lying like that is a great way to have to deal with lawsuits from every
investor who isn’t convinced that the deal is a good idea.

~~~
broknbottle
It's not a lie if you believe it ;)

~~~
acdha
It is, however, if there’s documentation showing something else which comes up
in discovery. Seriously, never try this.

------
indopedia
Learning RHEL now :)

~~~
techntoke
You're much better off learning core Linux utilities like from installing
Arch, rather than outdated distro specific management.

~~~
McAtNite
Assuming he’s coming from a Windows background learning core Linux utilities
on Redhat is also possible. At least going through rhel he can reference the
Redhat documentation which tend to be far better written than the million free
guides out there.

As a real life example, the other day I needed to migrate /var on a Linux box.
The freely available CentOs guides covered it well, but when I was done the
applications were having a lot of issues. Going through Redhat’s documentation
it quickly became obvious that the other articles neglected to mention
rebuilding the grub boot files and getting SELinux running on the new
directory.

~~~
techntoke
Considering that after RHEL took over CentOS, they are again significantly
behind RHEL, and RHEL isn't cost-effective... he could find equal support and
probably much more from the Ubuntu community. CentOS or RHEL doesn't even have
a public package search, and for good reason. When you find out that they are
using an outdated kernel, and outdated qemu/libvirt components, you'll quickly
find yourself installing RPMs from a bunch of different locations from Google
searches.

~~~
the_why_of_y
Looking at the "Delay" column in the release tables in Wikipedia, it appears
that it's CentOS7 releases that have longer delays, the CentOS6 delays haven't
changed in recent years (and there's nothing like the huge delays in 2011).
Possibly because there are more packages being updated in 7?

[https://en.wikipedia.org/wiki/CentOS](https://en.wikipedia.org/wiki/CentOS)

Package search is on [https://git.centos.org/](https://git.centos.org/)

For example, libvirt is at version 4.5 in CentOS 7.6, while CentOS 7.0 shipped
with version 1.1:
[https://git.centos.org/rpms/libvirt/commits/c7](https://git.centos.org/rpms/libvirt/commits/c7)

Whereas in Ubuntu 18.04 LTS, it's at version 4.0:
[https://packages.ubuntu.com/search?keywords=libvirt&searchon...](https://packages.ubuntu.com/search?keywords=libvirt&searchon=names&suite=bionic&section=all)

The RHEL kernel's version number is doesn't signify as much as you'd think,
there are whole subsystems backported into it from later upstream kernel
releases.

