International Business Machines Corp. faced a significant drop of about 9% in extended trading following disappointing sales in its consulting unit, overshadowing its recent acquisition of software firm HashiCorp Inc. The company reported a 1% increase in first-quarter sales, reaching $14.5 billion, as stated in a release on Wednesday. IBM also reaffirmed its projection of $12 billion in free cash flow for the fiscal year ending in December.
Simultaneously, IBM revealed its agreement to acquire HashiCorp for an enterprise value of $6.4 billion, marking its largest acquisition since the purchase of Red Hat in 2019 for $31.8 billion. This move aligns with Chief Executive Officer Arvind Krishna’s strategy to transition the legacy tech hardware company into a software and services-focused entity. IBM’s recent acquisitions, including Apptio for $4.6 billion, demonstrate this shift in focus.
CEO Arvind Krishna expressed optimism about the acquisition, highlighting HashiCorp’s ability to assist clients in managing modern infrastructure complexities. The integration of IBM’s expertise with HashiCorp’s technology is expected to create a robust hybrid cloud platform tailored for the AI era.
Following the announcement, IBM’s shares experienced a decline in extended trading, dropping to $166.51 after closing at $184.10 in New York. Despite this, the stock has shown a 13% increase this year, outperforming the S&P 500 Information Technology Sector Index’s 6.2% rally.
With the acquisition of HashiCorp, IBM plans to leverage its global customer base, following the successful ‘Red Hat playbook.’ Chief Financial Officer Jim Kavanaugh anticipates a positive impact on earnings and foresees HashiCorp’s free cash flow margin reaching 30% to 40% under IBM’s management.
IBM’s focus on AI-related products and consulting has resulted in over $1 billion in bookings since mid-2023, with a significant portion expected to be recognized as revenue in 2025. Investors have been closely monitoring IBM’s consulting division, which generated $5.2 billion in revenue in the quarter ending March 31, remaining flat compared to the previous year.
