So what is IBM buying for this $34 billion and $20 billion in debt? According to its LTM financials, Red Hat has $3.2BN in revenue and $603MM in EBITDA. These numbers are expected to grow to $3.9BN by 2020, when EBITDA will hit $1 billion. In other words, on an EV basis, IBM is paying roughly 31x (net of $2.2BN in cash) Red Hat's 2020 forward EBITDA.
Of course, if one assumes continued EBITDA growth for the foreseeable future, this acquisition could make sense. The problem is that between the threat of a recession in the next few years, and aggressive competition from Amazon, Microsoft and others for cloud market share, this is a very aggressive assumption. Meanwhile, in exchange for this $1 billion in EBITDA, IBM's net debt will grow from $32.5 billion currently to $52 billion, almost doubling IBM's net leverage from 1.7x level to a whopping 3.2x, and well on its way to a BBB rating if not worse. Which is why IBM promise that it will "target a leverage profile consistent with a mid to high single A credit rating" is, with all due respect, laughable.