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Is IBM Weighing Up A Bid For Monitise Plc?

IBM monitiseis one of the world’s largest companies and counts Warren Buffett as one of its main shareholders. Nevertheless, IBM has been struggling over the past five years or so, as the rise of cloud computing has hurt the company’s core server business. 

In an attempt to modernise its offering, IBM is branching out and part of this expansion plan was a partnership with Monitise (LSE: MONI). However, after the release of IBM’s dismal third quarter earnings report, this partnership could be about to develop into something more. 

Keeping up

It has long been known that IBM is struggling to keep up with an industry-wide shift in technology. So, to try and keep up with wider industry development and return to growth, IBM is pushing into new markets, such as mobile payments and cloud computing.

This is where Monitise comes in. Indeed, around 90% of the world’s banks already use technology designed and supplied by IBM. The company is a trusted partner for banks and has been for decades but the group lacks experience in mobile payments. As part of IBM’s drive to increase its mobile presence, it makes sense to have Monitise on board. 

But it’s unlikely that IBM is contemplating an outright acquisition straight away. With 20% of Monitise’s employees set to transfer to IBM, it seems as if IBM wants to get to know the company and its business model first, before making an offer. 

Shareholder pressure 

IBM may be forced into action sooner than expected after the company’s third-quarter results disappointed investors and management discarded the company’s five-year growth plan. As a result, shareholders are clamouring for change at the company, which could force its hand into making an offer for Monitise. 

Moreover, if IBM were to make a move for the mobile payments processor, it’s likely that the company would have to offer a hefty premium for Monitise’s shares. With heavyweights like Visa and billionaire, Leon Cooperman owning a large chunk of Monitise, it’s unlikely that they will let IBM buy up Monitise at a low-ball price. 

Leon Cooperman is a vocal supporter of Monitise’s business model and firmly believes that the company is the next big thing in the mobile payment technology space. Cooperman recently revealed that he had not sold a single share in the company during the recent sell-off. The billionaire actually tried to boost his stake recently by offering to buy Visa’s stake. Visa refused to sell.

Still, IBM can afford to offer a significant premium for Monitise’s shares. IBM chucked out more than $13bn in free cash flow last year, making Monitise’s market cap of around $1bn look insignificant.

The bottom line

So all in all, IBM could be considering a bid for Monitise as the company tries to reinvent itself and drive growth. The two companies are already working together and IBM has plenty of cash floating around to fund a bid. 

That said, if you don't think Monitise will survive long enough to be acquired by IBM, there are other opportunities out there. 

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Rupert Hargreaves owns shares of IBM. The Motley Fool UK owns shares of Monitise. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.