Biggest Indian IT deal! HCL Tech buys select assets of IBM for $1.8 billion

By: | Published: December 8, 2018 5:37 AM

A large portion of the deal will be funded through internal accruals along with a debt of $300 million.

With the acquisition, HCL Tech is looking at access to 5,000-plus large clients across a wide range of industries and geographic markets, along with sales and marketing teams.

The country’s third largest software exporter, HCL Technologies, on Friday said that it will buy some software assets from US-based IBM Corp for $1.8 billion, marking the largest purchase ever by an Indian IT services firm.

HCL Tech will buy seven software platforms from IBM, giving it a larger clientele and allowing it to step up its presence in areas such as commerce, security and marketing — an over $50-billion market opportunity that the company said would help boost profit.

The deal will also help HCL Tech collect an additional revenue of about $650 million in the second year of the acquisition on a run-rate basis, though sales would take a roughly $25 million hit in the first year.

A large portion of the deal will be funded through internal accruals along with a debt of $300 million. The transaction is expected to close by mid-2019. However, the market was not enthused with the deal and HCL Technologies shares closed down 4.98% at Rs 961.55 on BSE. In the intra-day trade, it fell 7.7% to Rs 935 after the deal was announced.

According to some IT analysts, the deal did not make strategic sense for HCL Tech over the long-term because it already maintained a partnership with IBM for a bulk of the products it was buying
and was overpaying for the purchase.

The products being acquired were in the middle or end of their life cycles and would likely not show more than a mid-single digit percentage growth, brokerage firm Axis Capital said in a note.
Analysts said that HCL would have to keep investing in these products to ensure they don’t become obsolete.

However, brokerage, Edelweiss said the deal demonstrates HCL Tech’s aggressive focus on transition to platform and product–led solutions. “Economic benefits are still being evaluated and accordingly management was tight lipped on amortisation details. While at approximately 6x EV/Ebitda the deal appears attractive, we await further clarity on revenue cannibalisation and amortisation accounting,” it stated.

For IBM, however the deal is an opportunity to further trim its legacy businesses as it is increasingly focusing on cloud computing.

The software products IBM is selling include Appscan for secure application development, BigFix for secure device management, Unica (on-premise) for marketing automation, Commerce (on-premise) for omni-channel eCommerce, Portal (on-premise) for digital experience, Notes & Domino for email and low-code rapid application development, and Connections for workstream collaboration.

HCL and IBM also have an ongoing IP partnership for five of these products.

With the acquisition, HCL Tech is looking at access to 5,000-plus large clients across a wide range of industries and geographic markets, along with sales and marketing teams. The company claims there is a highly profitable revenue stream, with a significant annuity component and a large
client-base with existing software license contracts.

C Vijayakumar, president and CEO, HCL Technologies, said in a release that the company continues to see great opportunities in the market to enhance its Mode-3 (products and platforms) offerings.

“The products that we are acquiring are in large growing market areas like security, marketing and commerce which are strategic segments for HCL. Many of these products are well regarded by clients and positioned in the top quadrant by industry analysts,” he said.

John Kelly, IBM senior vice-president, cognitive solutions and research, stated that the company believes the time is right to divest these select collaboration, marketing and commerce software assets, which are increasingly delivered as stand-alone products. “At the same time, we believe these products are a strong strategic fit for HCL, and that HCL is well positioned to drive innovation and growth for their customers,” he said.

HCL Technologies reported a 16.1% rise in its second quarter profit at Rs 2,540 crore compared to the same period last year. Revenues were up 19.5% y-o-y at Rs 14,861 crore.

Revenue in constant currency was up 10.5% y-o-y, while net profit in dollar terms stood at $357 million, up 5.1% y-o-y.

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