Could IBM (IBM) Pull Off Another Major Software Mega-Merger? Bernstein Highlights 12 Stocks That Might Be on the Radar

May 20, 2022 12:09 PM EDT
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Amid the carnage in software stocks, could IBM (NYSE: IBM) be on the verge of another massive takeover deal? That is what Bernstein analyst Toni Sacconaghi recently proposed to clients and thinks IBM could potentially be gearing up for a $20-$30 billion mega-deal.

Sacconaghi highlights that IBM has been relatively explicit about what it expects in a deal, including that the target company be free cash flow accretive on an "all in" basis "in the "short-term."

Sacconaghi identified 32 software companies between $5 and $20B in market cap, that had 21-23 revenue CAGR of 20%+ and are expected to be FCF positive in 2022. He narrowed the group down to 12 that appear likely to achieve the IBM hurdle.

The list includes: CyberArk (NASDAQ: CYBR), Databricks (private), Dynatrace (NYSE: DT), Elastic (NASDAQ: ESTC), MongoDB (NASDAQ: MDB), New Relic (NYSE: NEWR), Nutanix (NASDAQ: NTNX), Palantir (NYSE: PLTR), Snowflake (NYSE: SNOW), Splunk (NASDAQ: SPLK), UiPath (NYSE: PATH), and Zscaler (NASDAQ: ZS).

From there, Sacconaghi thinks three of the stocks appear most inline with IBM's criteria: Splunk, Dynatrace and potentially Palantir.

On how the market would react to IBM's stock on a new deal, the analyst said generally the market has been skeptical of large deals and even sold the stock off 8% on IBM's RedHat deal. However, RedHat has been a "success" for IBM and if the company can acquire an attractive asset that could soon be FCF accretive and accelerate company growth, the deal may be viewed positively, he said.

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Sanford C. Bernstein, Definitive Agreement, Toni Sacconaghi