INTERNATIONAL Business Machines (IBM) dropped about 9 per cent in extended trading after the company’s weak consulting unit sales disappointed investors, overshadowing its acquisition of software firm HashiCorp.

First-quarter sales gained 1 per cent to US$14.5 billion, the Armonk, New York-based company said on Wednesday (Apr 24). IBM also reiterated its previous outlook of US$12 billion in free cash flow for the fiscal year ending in December.

Separately, IBM announced it has agreed to buy HashiCorp, which sells software that helps companies manage their cloud-computing operations, for an enterprise value of US$6.4 billion. The acquisition is IBM’s largest since buying software firm Red Hat in 2019 for US$31.8 billion.

The deal is another move by chief executive officer Arvind Krishna to turn the legacy tech hardware company into one focused on high-growth software and services. Big Blue has made other acquisitions in this area, such as Apptio for US$4.6 billion last year, and divested managed infrastructure, weather and health businesses.

“HashiCorp has a proven track record of enabling clients to manage the complexity of today’s infrastructure and application sprawl,” Krishna said. “Combining IBM’s portfolio and expertise with HashiCorp’s capabilities and talent will create a comprehensive hybrid cloud platform designed for the AI (artificial intelligence) era.”

The shares declined to a low of US$166.51 in extended trading after closing at US$184.10 in New York. The stock has gained 13 per cent this year, exceeding the S&P 500 Information Technology Sector Index rally of 6.2 per cent.

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With the HashiCorp acquisition, IBM will run the “Red Hat playbook” by pushing the product to its global catalogue of customers, chief financial officer Jim Kavanaugh said. The deal will boost earnings before interest, taxes, depreciation and amortisation within the first year, he added, and sees HashiCorp’s free cash flow margin climbing to 30 to 40 per cent as a part of IBM.

IBM has eclipsed US$1 billion in bookings for AI-focused products and consulting since mid-2023, Krishna said. That figure is roughly two-thirds consulting, and will mostly be recognised as revenue in 2025, Kavanaugh added.

Investors have been focused on the potential for slippage in IBM’s consulting division, which is its second-largest business. That unit’s revenue was US$5.2 billion in the period ended Mar 31, unchanged from the quarter a year earlier.

The consulting results reflect a “weak IT spending climate”, wrote Anurag Rana, a senior analyst at Bloomberg Intelligence. Kavanaugh said that clients continue to tighten their spending owing to an uncertain economic environment.

Red Hat posted sales growth of 9 per cent, another comparatively slow period for a business that once regularly jumped more than 20 per cent each quarter. Profit, excluding some items, was US$1.68 a share.

HashiCorp posted a sales gain of 22 per cent to US$583 million in its most recent fiscal year, which ended in January. The company has struggled recently due to a mix of sales execution and slowing cloud migrations, wrote Jason Ader, an analyst at William Blair. “As part of IBM, HashiCorp could benefit from a more standardised sales approach and better ability to bundle tools to drive up the value of paid subscriptions,” he wrote. BLOOMBERG