Summary
IBM pays $33 billion for Linux vendor Red Hat.
Synergies will be extensive.
IBM has done this successfully before.
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This week IBM (IBM) offered $33 billion for Red Hat (NYSE:RHT), the big Linux-based software company. Many pundits think IBM overpaid, but if you look at the synergies available and IBM's history with other software companies, you can see how it will almost certainly work out well for IBM.
Current valuation comparison
RHT has a profitable business doing about $3 billion a year in sales, growing at about 20% per year. More importantly, they have an FCF (free cash flow) of about $1 billion per year making the purchase price 33x FCF.
That may seem high, but a company growing at 20% doubles its revenue in about 3 and ½ years, so over that time period, the FCF would most likely double (or more) over that same time period. This would put the price at about 17x FCF a very reasonable number for a sizeable tech company growing at that rate.
