Shares fall after report of potential merger of companies with $4 billion in debt
Investors and analysts alike have been speculating about the potential merger between Microsoft and IBM in the wake of Microsoft’s quarterly results.
In response, Microsoft shares fell on Thursday after IBM reported that its debt load had more than doubled to $4.9 billion.
Microsoft shares closed at $39.90 on Thursday, compared with a gain of 1.6% on Friday.
IBM shares were down 0.6%.
Shares of the two companies have a combined market capitalization of $8.7 billion.
The two companies’ combined debt is about twice as much as their combined assets, according to a recent research report by financial services firm Jefferies.
“I think we are seeing a trend of companies in this space looking for more value,” said Matt Lauer, chief investment officer at U.S.-based asset management firm Pimco.
“There are lots of opportunities out there and IBM is certainly one of them.”
The two sides have also been in talks about a potential merger, according a Bloomberg report published on Thursday.
Microsoft and the giant technology company IBM, both based in San Jose, California, have been in discussions with other potential mergers for years.
In February, Microsoft announced plans to acquire Watson, the company’s AI research and development platform, for $400 billion.
Watson is expected to be used to help make artificial intelligence (AI) applications such as medical diagnostics, speech-recognition systems, and social media.
IBM has been looking to spin off its Watson-based artificial intelligence and data-science arm, Watson Research, into a standalone company for years, but the two sides are still in discussions about how to do it.
IBM’s Watson research division, which employs roughly 3,000 people, is expected by the end of the year to reach 10,000 employees, according the company.
In October, IBM reported it had earned $438 million from its Watson business during the first quarter of 2018, up from $315 million the same quarter a year earlier.
The company has said the acquisition will help it accelerate Watson’s commercial growth, including in healthcare, which it has been focused on for more than a decade.
IBM will still have to pay interest on the debt.
However, analysts at RBC Capital Markets predicted that the deal could result in a net gain for the two firms of about $300 million a year in 2020.
IBM declined to comment.
The companies are also in talks to buy or merge more companies, including IBM’s PC business, which has been under pressure from Microsoft and other companies.
Microsoft said Thursday that it will make $1 billion in stock and debt payments to acquire its hardware business in the coming months, but did not give a timeline for when the transaction would be completed.
The deal will also allow the two groups to share some of their data, which could lead to some synergies.
IBM and Microsoft have been trying to merge for years because of the growing importance of AI, and the two businesses are also closely linked through a partnership with Microsoft called Research Labs.