IBM Nears Roughly $11 Billion Deal for Confluent

What happened

IBM is reportedly close to acquiring Confluent, a data-infrastructure company, for approximately $11 billion, as per a Wall Street Journal article. This move aligns with IBM's hybrid cloud and AI strategy, aiming to enhance its data platform capabilities. However, the DeepValue master report highlights IBM's overvalued stock, trading at a P/E of 33.5x and 86% above intrinsic value. The acquisition could strain IBM's balance sheet, with net debt/EBITDA already at 3.65x and interest coverage of 6.07x, raising concerns about financial flexibility. Investors must critically assess whether this deal will drive sustainable growth or merely add debt without improving the margin of safety.

Implication

Acquiring Confluent may strengthen IBM's data streaming and integration capabilities, supporting its hybrid cloud and AI initiatives. However, the $11 billion price tag could elevate net debt, potentially worsening the net debt/EBITDA ratio from 3.65x and straining the balance sheet further. Given the SELL rating due to overvaluation, success depends on Confluent accelerating Software segment growth and improving free cash flow to justify the cost. Integration challenges and potential distraction from core platform cycles like z17 and Power11 add execution risks that could undermine strategic benefits. Investors should monitor post-deal financials and execution closely to determine if it warrants a shift from the current bearish stance.

Thesis delta

The potential acquisition of Confluent introduces a data-infrastructure element to IBM's hybrid cloud and AI strategy, but it does not immediately address the core concerns of overvaluation and balance sheet strain. For the thesis to shift from SELL, the deal must lead to sustained revenue growth in Software, improved free cash flow, and deleveraging, as outlined in the watch items. Until such evidence emerges, the SELL rating remains justified based on current financial metrics and execution risks.