RALEIGH – Just because the IBM-Red Hat $34 billion merger is now closed doesn’t mean all questions have been answered about what the deal will mean to the Triangle. One big one: Will there be layoffs?
NCSU economist Dr. Mike Walden sees mostly an “upside” to the deal beyond the immediate influx of cash from the $190 per share being paid to Red Hat share holders. A lot of Hatters are now more than paper rich, although big sums of the cash will go to institutional investors.
“On the plus side, if bringing together IBM and Red Hat in expanding services for the ‘cloud [computing] creates new leverage, clout, and appeal to clients for the new company, then employment could expand as the company expands,” Walden tells WRAL TechWire.
“So this could be a case where 1 + 1 equals more than 2.”
Both companies already employ thousands across the Triangle. IBM has said Red Hat’s headquarters will remain in Raleigh; its top executives remain in charge; and Red Hat will operate as a separate entity. Yet such assurances might not mean no job losses. After all, IBM must pay for the merger.
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IBM chair and CEO Ginni Rometty has stressed the leverage Red Hat – its talent, technology and team – gives IBM in the growing cloud market as the key reason for the deal.She sees a trillion dollar opportunity in a market largely ruled by Amazon Web Services, Microsoft and Google.
One of Big Blue’s most modern cloud data centers also happens to be based in RTP where IBM operates one of its largest campuses.
Chances for layoffs?
In many mergers such as this, layoffs often result as companies look to cut down on so-called redundancies in areas such as human resources, back office support and financial services. But Walden is not so sure there will be job cuts this time.
“Although I have no inside information, I would expect the merger logistics to occur reasonably rapidly – months, rather than years,” Walden explains, expecting IBM-Red Hat moves to occur quickly. The companies already have had meetings to discuss how to make the deal work, Red Hat CEO Jim Whitehurst saying recently – perhaps in humor – that there have been some clashes of culture.
However, IBM has taken several steps to brace for the cash outflow of the biggest deal in the tech giant’s storied history.
Rometty went to bond markets to raise $20 billion to help pay for the deal, thus adding to Big Blue debt.
As soon as the deal was announced last October, IBM also stopped buying back stock – another drain on cash even as the buybacks helped solidify IBM share value.
The company also laid off some 1,700 workers recently.
And it has sold off some businesses to raise more capital.
‘Minimal’ job cuts
But Walden sees other factors in play that could help stem any layoffs.
“With mergers, always the biggest concern is the potential for layoffs. Merging two companies who do the same thing creates overlap and possibilities for consolidation of similar services and job positions,” he says.
“However, apparently this is NOT the case with the Red Hat-IBM merger.
“The two firms have already had a partnership, so they have been working together. Also, the merger announcement indicated Red Hat would remain a distinct unit, and its independence would be preserved.
“This says to me employment losses will be minimal; at least, this is my expectation.”
