IBM Corp’s recently-announced acquisition of Apptio Inc for $4.6 billion is “a bit pricey” relative to public small-cap software valuations, UBS analysts wrote in a note to clients.
They have a ‘Sell’ rating on shares of IBM with a 12-month target price of US$110 per share.
The analysts believe the cash purchase price of about 50% of IBM's calendar year 2022 free cash flow for a company that could generate $573 million in 2024 is “a bit elevated” at an estimated 8 times given the median/mean small cap software enterprise value and revenue multiple of 4.0 times and 4.5 times, respectively.
“Even factoring in a 30% control premium and potential future synergies, the purchase price multiple is still rich in our view,” they wrote.
According to the company, Apptio has over 1,500 clients (up from over 550 in 2018) that are expected to leverage IBM's AI offerings (announced in May) as well as its legacy hybrid cloud offerings.
Analysts at UBS think Apptio's suite of as-a-service offerings should integrate well with IBM's existing portfolio of hybrid cloud offerings given it already partners with leading hyperscalers including AWS, Azure, and GCP, in addition to other large application vendors like Salesforce, ServiceNow, Oracle, and SAP.
That said, they stated that unless there is a material acceleration in revenue under IBM's ownership they believe the 'premium' to buy the asset may be difficult to recover on a net present value (NPV) basis.
Shares of IBM rose 1.2% to $132.90 in mid-afternoon trading on Tuesday but have fallen 6% year to date.
Contact Sean at sean@proactiveinvestors.com