Rationale of the deal.
IBM’s proposed acquisition of Red Hat aims to combine the world’s largest IT service vendor with the biggest open source software company in a deal that isn’t expected to raise significant regulatory concerns. The companies overlap in the provision of infrastructure software and application software, though the merger is mostly vertical with complementary businesses. Regulatory approvals from the U.S. and the EU are needed, but the companies won’t need approval from China to close the transaction.
80% chances of approval
The IBM-Red Hat merger will likely be cleared, given the limited horizontal overlaps between their businesses. EU precedents on Oracle-Sun, Micro Focus-HPE and most recently in Microsoft-Github suggest that middleware and DevOps are very fragmented markets with low barriers to entry. The companies aren’t likely to have a significant combined market share in the relevant markets in which they overlap. This means the deal isn’t likely to raise horizontal concerns, which are ultimately the sort that could complicate approval.
Parties may get unconditional approval
The rationale for the deal and IBM’s internal documents may be enough evidence to fend off possible vertical or conglomerate concerns. EU regulators may want reassurance that IBM won’t damage the open source community and won’t condition access to Red Hat’s products and services on the use of IBM’s products. IBM’s internal documents showing how to capture cross-selling opportunities without compromising Red Hat’s neutral status may help avoid imposition of behavioral remedies, as Microsoft did when it acquired Github.
Approval likely in 3Q
The companies may get a phase one merger approval after long pre-notification talks. Unlike other deals in new technology markets where regulators had to gather a lot of information before proceeding with the analysis, the European Commission has reviewed a number of deals in this sector in the past several years. This could allow regulators to reach a decision during a phase one review, including remedies if needed.
Companies don’t need approval from China
Regulatory approvals from the U.S. and the EU are needed, but the companies won’t need approval from China to close the transaction. The deal may hit unexpected delays, given the uncertainty surrounding Brexit and the EU elections in 2019. The companies may need to file the deal in London and Brussels. If the companies were to file the deal only in Brussels and the EU decision comes after March 29, in the event of a “no-deal” Brexit scenario, the parties may not be able to close the merger until they get a separate U.K. approval. Additionally, if the parties file the deal in Brussels in 2Q, the decision may be slowed by the European elections to be held in May.
