Monday Market Madness – IBM’s $33Bn Shopping Spree Gives Tech Investors Hope

Hope.

It's a powerful thing.  IBM (IBM) announced over the weekend that they will be buying Red Hat Softwars (RHT) for $33Bn which is more than 50% over Friday's $20 close at $116.  I noted in our chat room this morning that $33Bn may have seemed less ridiculous as IBM began negotiating with RHT, probably over the summer as RHT had just been at that valuation – though the people who valued them there were IDIOTS, of course.  

RHT has $3Bn in earnings and $250M in profit.  If it were an IBM division it would have been shut down years ago as not worth keeping but IBM sees RHT as leverage as their customers are the customers of Amazon (AMZN), Microsoft (MSFT) and pretty much all the other cloud providers and that gives the mighty IBM sales force a foot in the door to leverage the 10s of Billions of Dollars they spend on cloud services and THAT is why this deal makes sense for IBM.  

Image result for rometty ibm cartoonIt's also a brave and confident move by IBM CEO Ginny Rometty and it's the kind of thing woman CEOs do that men almost certainly would not, which is make a move that carries a lot of personal risk for them, has no immediate payback but paves the way for the company to be much healthier in the distant future.  It's a nurturing move and the question now is whether she will be tarred and feathered for making it but predominantly male investors and analysts.  

We're in a fairly painful IBM position in our Long-Term Portfolio as we sold 5 2020 $145 puts in January for $12.50 to net in at $132.50 but this morning IBM will open around $120 so we're down about $6,250 (100%) on those.  We also bought 15 2020 $120/150 bull call spreads for $14 ($21,000) back in July and yes, we still have all of next year but now net $9 is down $6,000 on that end too – ouch!   

I think a lot of short-term investors may pull the plug but I have long-term faith so, most likely, we'll rescue $13 from the 15 2020 $120 calls
continue reading