Buy Confluent For The Attractive Arbitrage Spread, Buy IBM For Potential Hybrid Cloud Dominance
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Ahmed Abdelazim2.79K FollowersFollow5ShareSavePlay(22min)CommentsSummaryIBM’s $11 billion acquisition of Confluent makes the latter an attractive arbitrage play with a potential 3.13% arbitrage premium over the risk-free 6-month treasury.Confluent adds a crucial data layer to IBM’s hybrid cloud and AI stack which could help unlock the full potential of Red Hat, HashiCorp, and watsonx.IBM’s go-to-market scale combined with growing demand for data streaming platforms, such as offered by Confluent, could help rapidly accelerate IBM’s software growth.IBM’s high Fortune 500 penetration rate and international footprint creates massive opportunities for operating leverage, which could see Confluent contribute positively to IBM’s EPS in the second year post deal.I’m estimating Confluent’s revenues to grow 2.1 times in the first 5 years post deal while generating a 26% EBIT margin and 20.8% profit margin in the fifth year post deal. akinbostanci/E+ via Getty Images Earlier this week, International Business Machines Corporation (IBM) made a significant move by acquiring Confluent, Inc. (CFLT) in an all-cash deal. From Confluent’s perspective, the deal offers an attractive low-risk opportunity to secure an annualized return of 6.76%, representing aThis article was written byAhmed Abdelazim2.79K FollowersFollowAs a former managing editor at a financial media publication focused on mid and small caps, I am using my experience to present investment opportunities in undervalued companies. My experience, combined with my academic background in financial markets and institutions, allows me to bring thorough research and analysis of financial statements, market trends, as well as upcoming events that may impact specific companies or industries.Analyst’s Disclosure:I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.Quick InsightsHow does IBM expect Confluent to impact its EPS and margins?IBM projects Confluent to be EPS-accretive starting in year two post-deal, reaching a 26% EBIT margin and contributing $0.77 to EPS by year five.What is the arbitrage opportunity for Confluent shareholders pre-acquisition?At a $1 spread to IBM's offer, CFLT presents a 6.76% annualized return, a 3.13% premium over the 6-month treasury, with high deal-closing probability.What are the key risks to the IBM-Confluent deal and its financial impact?Primary risks include regulatory delays or blockage, which could erode arbitrage value for CFLT and stall IBM's software growth and expected cost synergies.Recommended For You