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Amid uncertainty surrounding the trade war and mid-term election, the technology sector, which saw brutal trading this month, is sizzling hot once again following the mega merger deal. This is especially true given that International Business Machines (IBM - Free Report) has agreed to acquire the software company Red Hat Inc. for $34 billion in all-cash deal in in the biggest acquisition of its 100-year history.
Under the terms of the deal, IBM would be paying $190 per share in cash for Red Hat, nearly 63% premium to the Oct 26 closing price and a roughly 7% premium to the 52-week high that it set in June. The transaction, expected to close in the second half of 2019, has been approved by the boards of directors of both IBM and Red Hat but is yet to get approval of Red Hat shareholders as well as U.S. regulators (read: Global M&A Momentum to Wane in 2019? ETFs in Focus).
If approved, this would be the third-largest tech deal after Dell Technologies buyout of EMC for $67 billion in 2016 and the $41 billion acquisition of SDL by JDS Uniphase in 2000, excluding the AOL-Time Warner merger.
The deal will be a big leap for IBM and is a game-changer in the fast-growing and lucrative cloud market. Per IBM Chairman, President and Chief Executive Officer, "IBM will become the world's #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.” IBM said it remains "committed to maintaining strong investment grade credit ratings" and will target a leverage profile consistent with "a mid to high single-A" grade.
Additionally, the acquisition will reinforce IBM's high-value model. It will accelerate IBM's revenue growth, gross margin and free cash flow within 12 months of closing. It also will support a solid and growing dividend. However, the tech giant intends to suspend its share repurchase program in 2020 and 2021.
Market Impact
Though the acquisition is the best way for IBM to capture a greater share of the cloud market in the coming years per CEO Ginni Rometty, the huge premium paid for the deal pushed the IBM shares to the lowest level since Feb 11, 2016 at the close. The high price is view as reducing spending, cutting share buybacks, and has even drawn negative attention from credit rating agencies. The S&P downgraded IBM to A from A+, following the merger announcement while Moody's placed its A1 rating under review for downgrade. IBM saw massive trading volume of 20.5 million on the day compared with average daily volume of 5 million.
On the other hand, Red Hat shares spiked more than 45% to close the day while share volume of nearly 31 million crushed the average daily volume figure of 1.9 million shares (see: all the Technology ETFs here).
The news led to the surge in software stocks like Pivotal Software , Splunk , Hortonworks , Nutanix (NTNX - Free Report) , Workday (WDAY - Free Report) , Dropbox (DROP - Free Report) and Zscaler ZS in anticipation that number of cloud M&A might be on the way. The premium valuation for Red Hat makes them more attractive.
ETFs to Watch
The announced acquisition has put the spotlight on the ETFs having higher exposure to the IBM. Below we have highlighted these in detail and could be compelling choices to tap the IBM-Red Hat deal.
First Trust NASDAQ Technology Dividend Index Fund (TDIV - Free Report)
This fund provides exposure to dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index. The product has amassed about $902.4 million in its asset base while trading in volume of around 70,000 shares per day. It charges 50 bps in annual fees and holds about 97 securities in its basket. IBM takes the fifth spot in the fund, making up roughly 7.6% of the assets (read: Further Selloffs Ahead? ETF Strategies to Follow).
Invesco Dow Jones Industrial Average Dividend ETF (DJD - Free Report)
This ETF offers exposure to high-yielding companies included in the Dow Jones Industrial Average by their 12-month dividend yield over the prior 12 months. It holds 30 stocks in it basket, with IBM occupying the fourth position with 5.2% allocation. Consumer staples, information technology, healthcare, and industrials are the top four sectors. DJD has been able to manage assets worth $33.1 million while trading in volume of 7,000 shares a day on average. It charges 7 bps in annual fees and has a Zacks ETF Rank #3 (Hold).
This ETF offers exposure to quality stocks that have the highest dividend yield with a deep value bias and multi-factor fundamental analysis. It follows the Solactive Power Factor High Dividend Index, holding 51 stocks in the basket with IBM taking the sixth spot with 4.9% share. Consumer discretionary is the top sector with one-fourth of the portfolio while financials, communications and consumer staples round off the next three spots. The product has amassed $117.5 million in its asset base and trades in lower volume of 34,000 shares a day on average. It charges 70 bps in annual fees (read: 5 Dividend ETFs Worth Buying Now).
This product follows the Innovation Labs Blockchain Innovators Index, which measures the performance of a diversified group of publicly-listed companies that use, or are involved in, blockchain. Holding 49 stocks in its portfolio, IBM is the ninth firm with 4.3% share. The ETF has the largest allocation to information technology sector at 67% while financials, consumer discretionary and energy round off the next three spots. It has accumulated $9.8 million in its asset base since its debut in late January and trades in average daily volume of 5,000 shares. Expense ratio comes in at 0.65% (see: all the Cryptocurrency ETFs).
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4 ETFs to Tap IBM-Red Hat Potential Growth Deal
Amid uncertainty surrounding the trade war and mid-term election, the technology sector, which saw brutal trading this month, is sizzling hot once again following the mega merger deal. This is especially true given that International Business Machines (IBM - Free Report) has agreed to acquire the software company Red Hat Inc. for $34 billion in all-cash deal in in the biggest acquisition of its 100-year history.
Under the terms of the deal, IBM would be paying $190 per share in cash for Red Hat, nearly 63% premium to the Oct 26 closing price and a roughly 7% premium to the 52-week high that it set in June. The transaction, expected to close in the second half of 2019, has been approved by the boards of directors of both IBM and Red Hat but is yet to get approval of Red Hat shareholders as well as U.S. regulators (read: Global M&A Momentum to Wane in 2019? ETFs in Focus).
If approved, this would be the third-largest tech deal after Dell Technologies buyout of EMC for $67 billion in 2016 and the $41 billion acquisition of SDL by JDS Uniphase in 2000, excluding the AOL-Time Warner merger.
The deal will be a big leap for IBM and is a game-changer in the fast-growing and lucrative cloud market. Per IBM Chairman, President and Chief Executive Officer, "IBM will become the world's #1 hybrid cloud provider, offering companies the only open cloud solution that will unlock the full value of the cloud for their businesses.” IBM said it remains "committed to maintaining strong investment grade credit ratings" and will target a leverage profile consistent with "a mid to high single-A" grade.
Additionally, the acquisition will reinforce IBM's high-value model. It will accelerate IBM's revenue growth, gross margin and free cash flow within 12 months of closing. It also will support a solid and growing dividend. However, the tech giant intends to suspend its share repurchase program in 2020 and 2021.
Market Impact
Though the acquisition is the best way for IBM to capture a greater share of the cloud market in the coming years per CEO Ginni Rometty, the huge premium paid for the deal pushed the IBM shares to the lowest level since Feb 11, 2016 at the close. The high price is view as reducing spending, cutting share buybacks, and has even drawn negative attention from credit rating agencies. The S&P downgraded IBM to A from A+, following the merger announcement while Moody's placed its A1 rating under review for downgrade. IBM saw massive trading volume of 20.5 million on the day compared with average daily volume of 5 million.
On the other hand, Red Hat shares spiked more than 45% to close the day while share volume of nearly 31 million crushed the average daily volume figure of 1.9 million shares (see: all the Technology ETFs here).
The news led to the surge in software stocks like Pivotal Software , Splunk , Hortonworks , Nutanix (NTNX - Free Report) , Workday (WDAY - Free Report) , Dropbox (DROP - Free Report) and Zscaler ZS in anticipation that number of cloud M&A might be on the way. The premium valuation for Red Hat makes them more attractive.
ETFs to Watch
The announced acquisition has put the spotlight on the ETFs having higher exposure to the IBM. Below we have highlighted these in detail and could be compelling choices to tap the IBM-Red Hat deal.
First Trust NASDAQ Technology Dividend Index Fund (TDIV - Free Report)
This fund provides exposure to dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index. The product has amassed about $902.4 million in its asset base while trading in volume of around 70,000 shares per day. It charges 50 bps in annual fees and holds about 97 securities in its basket. IBM takes the fifth spot in the fund, making up roughly 7.6% of the assets (read: Further Selloffs Ahead? ETF Strategies to Follow).
Invesco Dow Jones Industrial Average Dividend ETF (DJD - Free Report)
This ETF offers exposure to high-yielding companies included in the Dow Jones Industrial Average by their 12-month dividend yield over the prior 12 months. It holds 30 stocks in it basket, with IBM occupying the fourth position with 5.2% allocation. Consumer staples, information technology, healthcare, and industrials are the top four sectors. DJD has been able to manage assets worth $33.1 million while trading in volume of 7,000 shares a day on average. It charges 7 bps in annual fees and has a Zacks ETF Rank #3 (Hold).
WBI Power Factor High Dividend ETF (WBIY - Free Report)
This ETF offers exposure to quality stocks that have the highest dividend yield with a deep value bias and multi-factor fundamental analysis. It follows the Solactive Power Factor High Dividend Index, holding 51 stocks in the basket with IBM taking the sixth spot with 4.9% share. Consumer discretionary is the top sector with one-fourth of the portfolio while financials, communications and consumer staples round off the next three spots. The product has amassed $117.5 million in its asset base and trades in lower volume of 34,000 shares a day on average. It charges 70 bps in annual fees (read: 5 Dividend ETFs Worth Buying Now).
Innovation Shares NextGen Protocol ETF (KOIN - Free Report)
This product follows the Innovation Labs Blockchain Innovators Index, which measures the performance of a diversified group of publicly-listed companies that use, or are involved in, blockchain. Holding 49 stocks in its portfolio, IBM is the ninth firm with 4.3% share. The ETF has the largest allocation to information technology sector at 67% while financials, consumer discretionary and energy round off the next three spots. It has accumulated $9.8 million in its asset base since its debut in late January and trades in average daily volume of 5,000 shares. Expense ratio comes in at 0.65% (see: all the Cryptocurrency ETFs).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>