International Business Machines Corporation (IBM - Free Report) is reportedly acquiring mainframe service business of T-Systems, per Reuters. Per IT-Zoom website (as revealed by Reuters), IBM is likely to pay 860 million euros (or approximately $986.16 million) for the acquisition.
Frankfurt, Germany-based T-Systems is engaged in providing IT services and consulting solutions worldwide. Notably, Deutsche Telekom holds a majority stake in the company.
Although the rumors are authenticated by few advances, there has been no official statement so far from IBM. Meanwhile, perT-Systems, the deal is subject to customary approval from anti-trust authorities.
In fact, T-Systems in a statement to Reuter, declared, “Existing customer contracts remain unaffected. T-Systems will continue to offer mainframe services, but with IBM in the future.”
Furthermore, an article in the leading German-daily, The Handelsblatt, citing an internal memo , adds weight to the rumored development. Notably, the memo states that 400 employees of T-Systems across six countries would transit to IBM around May.
The impending deal is anticipated to favor IBM’s prospects in its mainframe business.
Mainframe Cloud Computing: Key Takeaway
We may say that with the move (if it leads to fruition) IBM is aiming to enhance the prospects of its growth areas. In fact, IBM’s mainframe is doing well, lately.
Notably, IBM’s Cloud Managed Services deployed on its z mainframe systems, broadens the use of a mainframe to a secure scalable cloud platform enabling businesses to seamlessly adjust to evolving consumer needs.
IBM’s latest mainframe, the IBM z14, devised to accelerate enterprise-level workloads by offering cost-effective and secure cloud platform, is witnessing traction.
In fact, in the third quarter of 2018, IBM Z revenues increased 6% year over year on more than 20% MIPS growth, driven by broad-based adoption of the z14 mainframe.
The company is likely to benefit from reduced competition in the mainframe domain and increased adoption of services from expanding clientele, with the latest acquisition.
Notably, per ResearchandMarkets report, the global mainframes market is anticipated to witness a CAGR of 2.3% from 2017 to 2021. IBM is well poised to grow in mainframe cloud computing market on the back of its efforts to enhance mainframe business and hybrid cloud platform.
Dent on Cash Position: A Concern
In a bid to realize hybrid cloud goals, IBM is acquiring Red Hat for approximately $34 billion in cash, the buyout of which is anticipated to close in the latter half of 2019.
By acquiring the mainframe unit of T-Systems, IBM’s cash balance, which is crucial at this point of time, is likely to be impacted.
In fact, ballooning debt levels have been troubling the company lately. Notably, IBM ended third-quarter of 2018 with net debt of $32.2 billion compared with $33.6 billion reported in the previous quarter.
However, IBM is restructuring business to focus more on cloud computing avenues. The recent divestiture of IBM’s mortgage servicing unit to Mr. Cooper Group, as well as that of software products to HCL Technologies bode well for the cash balance.
Furthermore, the company is reportedly retrenching around 300 employees post offloading its mortgage servicing business to Mr. Cooper Group, which is likely to improve balance sheet position.
Zacks Rank & Key Picks
IBM carries a Zacks Rank #3 (Hold).
Veeva Systems Inc. (VEEV - Free Report) , SS&C Technologies Holdings, Inc. and Marvell Technology Group Ltd. (MRVL - Free Report) are a few stocks worth considering in the broader technology sector. All the three stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth rate for Veeva Systems, SS&C and Marvell Technology are currently pegged at 19.5%, 13.5% and 9.4%, respectively.
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