Geo­met­ric Deal to Strengthen HCL Met­rics Per­fect with HCL

Ex­perts say ac­qui­si­tion will trig­ger wave of con­sol­i­da­tion in en­gi­neer­ing sec­tor

The Economic Times - - Companies -

Surabhi Agar­wal &

Neha Alawadhi

New Delhi: HCL Tech­nolo­gies’ ac­qui­si­tion of Mum­bai-head­quar­tered firm Geo­met­ric on Fri­day is not only ex­pected to strengthen the HCL’s al­ready strong en­gi­neer­ing prac­tice, but also trig­ger a wave of con­sol­i­da­tion in a seg­ment, which is con­sid­ered to be the fastest grow­ing area for the In­dian IT ser­vices in the last two years.

The ac­qui­si­tion of Geo­met­ric for around $200 mil­lion will mark the com­pany’s third and largest ac­qui­si­tion in the en­gi­neer­ing sec­tor so far. De­spite the fact that Geo­met­ric had been strug­gling with slower rev­enues growth in a fast-grow­ing in­dus­try and the deal also doesn’t in­clude al­most one-fourth of the busi­ness which was exclusive to one client – Das­sault Sys­tems, mar­ket ex­perts are pos­i­tive about the deal. HCL has shelled out around $190 mil­lion for part of the Geo­met­ric busi­ness which is es­ti­mated to have rev­enues of $140 mil­lion.

Shashi Bhu­san, se­nior vice-pres­i­dent at IDFC Se­cu­ri­ties, said that HCL may have slightly over­paid for it, as the price is a lit­tle higher than the re­cent deals. “But, the de­ci­sion seems to be driven by HCL’s abil­ity to grow the rev­enues and mine Geo­met­ric’s clients through cross-sell­ing,” said Bhu­san, adding that HCL was any­way a “for­mi­da­ble player” in this seg­ment and the deal will fur­ther strengthen it.

How­ever, the two firms have a mar­gin mis­match. While Geo­met­ric’s mar­gins stood at 15%, HCL’s range is be­tween 21- 22%. “I don’t think there will be too much of an im­pact, HCL is a $6-bil­lion com­pany and Geo­met­ric’s busi­ness is not even $150 mil­lion which is not even 10% of the over­all rev­enues,” said Bhu­san. HCL, which drew around 18% rev­enues from en­gi­neer­ing and R&D ser­vices in the last quar- ter, has al­ready an­nounced two small ac­qui­si­tions — Trygstad Tech­ni­cal Ser­vices and Con­cept and Sil­i­con Sys­tems in the last few months in this space.

Some ex­perts are more skep­ti­cal of the deal. Sa­gar Ras­togi of Am­bit Cap­i­tal wrote in a note that while Geo­met­ric’s ser­vice lines — prod­uct life­cy­cle man­age­ment im­ple­men­ta­tion, out­sourced prod­uct devel­op­ment and me­chan­i­cal en­gi­neer­ing out­sourc­ing ser­vices — are slow-growth and low-mar­gin busi­nesses com­pared to em­bed­ded sys­tems en­gi­neer­ing or reg­u­lar IT ser­vices, the com­pany has some mar­quee clients such as Siemens, Cater­pil­lar, GM, Ford, Chrysler, Volvo, Goodyear, Trumpf, John Deere, Aero­lia (sub­sidiary of Air­bus) etc.

“This deal would have an in­signif­i­cant im­pact on the fi­nan­cials, but ac­quir­ing a legacy, In­dia-based busi­ness sends a bad sig­nal in our view. HCL Tech could have eas­ily ac­quired these ca­pa­bil­i­ties or­gan­i­cally at a much lower-cost in 3-6 months.” said Ras­togi, adding that their view on the stock re­mains pos­i­tive, be­cause of its good port­fo­lio mix — high ex­po­sure to fast­grow­ing ser­vice lines such as IMS and En­gi­neer­ing ser­vices — and cheap val­u­a­tions. am­bigu­ous ar­eas, there will be op­por­tu­ni­ties . I have no rea­son to be­lieve oth­er­wise and HCL has made it clear that they value the ta­lent.

What are your plans? They don’t need an­other CEO, do they? (laughs) We will see about what I do, but for the next 6 to 9 months, I have to de­liver and en­sure that our teams de­liver, stay fo­cused af­ter that I will be sup­port­ing the tran­si­tion at HCL. Then I will see. I have no par­tic­u­lar am­bi­tion to start some­thing or do some­thing. The first thing that is called for is re­lax­ation.

Time­line for the tran­si­tion? The deal is es­ti­mated to take be­tween 6 to 9 months since it re­quires reg­u­la­tory ap­provals. Then af­ter that I guess that in­ter­nal tran­si­tion will take an­other six month. How is the deal work­ing out for the share­hold­ers? Geo­met­ric’s main busi­ness is de­merged from Geo­met­ric, and ac­quired by HCL. Geo­met­ric share­hold­ers re­ceive for ev­ery 43 shares of Geo­met­ric, 10 shares of Geo­met­ric. And if you work out the math it comes to about .₹ 190 per Geo­met­ric share. In ad­di­tion, Geo­met­ric share­hold­ers will get a pref­er­ence share worth .₹ 68 which are redeemable and listed.

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