Software M&A: IBM’s RedHat Buy Sparks Takeover Target Speculation

It didn’t take too long for the ink to dry on IBM’s acquisition of RedHat for the speculation wheels to start churning as to which software company or companies will be the next targets.

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With the software industry, particularly the software as a service market, booming, Wall Street has been abuzz ever since the $34 billion deal was announced October 28. Calling it a game change, IBM Chief Executive Officer Ginni Rometty said it “changes everything about the cloud market,” when announcing the deal.  According to IBM with the purchase, it will become the leader in the hybrid cloud market at a time when companies are just starting to move more of their critical systems to the cloud. “Most companies today are only 20 percent along their cloud journey, renting compute power to cut costs,” Rometty said at the time. “The next 80 percent is about unlocking real business value and driving growth. This is the next chapter of the cloud. It requires shifting business applications to the hybrid cloud, extracting more data and optimizing every part of the business, from supply chains to sales.”

It doesn’t hurt that the handful of SaaS companies that have gone public so far this year have seen their stocks and thus their fortunes surge.  With the market red-hot, analysts were at the ready to provide their lists of potential targets, which runs the gambit from the earlier stage software companies to the later stage ones.  

Take JPMorgan Chase software analyst Sterling Auty for starters. In a research report when the deal was announced, the Wall Street analyst said there were six companies that have strong strategic positions that could be targets for suitors. According to coverage of the research report by Barron’s, the analyst said buying any of the six would provide suitors with attractive long-term opportunities. The list includes Okta, the cloud provider of client identity software, Palo Alto Networks, the network security software player, ServiceNow, the cloud helpdesk company, RingCentral, a cloud phone system provider, Aspen Technology, which makes optimization software and DocuSign, the e-signature company. The analyst, according to Barron’s, noted that none of the companies commented on the idea that they were takeover targets.

JPMorgan’s Auty wasn’t alone in driving the M&A speculation, on the heels of the RedHat deal. Wedbush analyst Dan Ives forecasts a surge in cloud M&A, saying in a note covered by Seeking Alpha that both strategic and financial acquirers will aggressively pursue cloud acquisitions in 2019. The Wall Street analyst pointed to Pivotal, Qualys, and Scaler, as the leading targets. Meanwhile, Michael Turits, an analyst at Raymond James, thinks large-cap software companies will become targets in the wake of the deal. The analyst named Splunk, ServiceNow, Atlassian, Workday and Tableau as targets, reported Seeking Alpha.