Fitch downgrades IBM

Fitch Ratings said downgraded the long-term ratings for International Business Machines Corp. (IBM) and its wholly-owned subsidiary, IBM Credit LLC, to A from A+.

Fitch also said it placed the ratings on negative watch following news that IBM entered into a definitive agreement to acquire open source software and services provider, Red Hat Inc., for a total consideration of $34 billion net of cash acquired.

The ratings reflect expectations for the continuation of negative overall operating results despite IBM's ongoing strategic transformation and growth in the systems segment, the agency said.

Fitch said it anticipates further profit margin contraction as IBM continues scaling its growth businesses and re-investing cost savings from legacy business restructuring in strategic imperatives.

The agency said it expects lower revenue and profitability will translate into free cash flow margins near 7% for 2018 and 2019, down from the high single digits in 2017 and more in-line with a mid- to low-A category rating.

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