HCL Tech to buy select IPs from IBM for $1.8bn

Business Standard - - FRONT PAGE - DEBASIS MO­HA­P­A­TRA

HCL Tech­nolo­gies will ac­quire select in­tel­lec­tual prop­er­ties (IPs) from global tech­nol­ogy gi­ant IBM in a deal val­ued at around $1.8 bil­lion, mak­ing it the largest ac­qui­si­tion in the do­mes­tic IT ser­vices space.

The Shiv Nadar-owned IT ma­jor said it would buy nine IPs from IBM in ar­eas like se­cure de­vice man­age­ment, mar­ket­ing au­to­ma­tion, om­nichan­nel e-com­merce, and dig­i­tal ex­pe­ri­ence. The all-cash deal, which is ex­pected to be con­cluded by mid -2019, will largely be funded through in­ter­nal ac­cru­als, along with a mix of $300 mil­lion in bor­row­ing.

Of the $1.8 bil­lion, around 50 per cent will be paid by the mid­dle of next year, while the rest of the pay­out will hap­pen over a pe­riod of 12 months fol­low­ing the clo­sure of the deal, com­pany ex­ec­u­tives said dur­ing an an­a­lyst call on Fri­day.

At the end of the sec­ond quar­ter of 2018-19, HCL, the coun­try’ s fourth-largest IT ser­vices provider, had cash and cash equiv­a­lents of around $1.6 bil­lion. HCL has al­ready put in place an ag­gres­sive IP-led growth strat­egy, in­vest­ing as much as $1.1 bil­lion in buy­ing prod­uct li­cences and IPs from com­pa­nies like IBM and DXC Tech­nol­ogy over the past cou­ple of years.

Through the cur­rent deal, the com­pany will also be able to reach out to around 5,000-strong en­ter­prise clients of IBM that are cur­rently us­ing these prod­ucts. Such client base cre­ates an op­por­tu­nity for the firm to cross-sell its var­i­ous of­fer­ings in the ser­vices space un­der Mode-1&2.Un­der the cur­rent ar­range-ment, em­ploy­ees who are man-ag­ing the sales of these IPs and plat­forms at IBM will now come on the rolls of HCL Tech. "This will en­hance our geo-graph­i­cal reach along with cre­at­ing a di­rect re­la­tion­ship with the cus­tomers. It also gives us the abil­ity to take our ser­vices of­fer­ings to clients around these prod­ucts," said C Vi­jayaku­mar, pres­i­dent & CEO at HCL Tech­nolo­gies. "In terms of man­age­ment band-width, we have built leader-ship for man­ag­ing prod­ucts and plat­forms within HCL. This is part of our long-term strat­egy," he added.

The Noida-head­quar­tered firm said it would re­ceive in­cre­men­tal rev­enues of $650 mil­lion an­nu­ally from 2021 on­wards. Sim­i­larly, it sees op­er­at­ing mar­gins from these prod­ucts to be around SO per cent af­ter two years of closing the deal. At this val­u­a­tion, the HCL-IBM deal be­comes the big­gest in­vest­ment made by any do­mes­tic IT ser­vices player in re­cent years. In 2009, Tech Mahin­dra had ac­quired the then scam-rid­den Satyam Com­puter Ser­vices for $1.2 bil-lion, while HCL Tech­nolo­gies had bought Axon Group for $731 mil­lion in 2011. De­spite pos­i­tive man­age-ment com­men­tary, the deal failed to en­thuse the mar­ket as the com­pany's stock fell close to S per cent to Z961.55 on Fri­day, when the bench-- mark Sen­sex closed 1.02 per cent higher. In­dus­try ex­perts and an­a­lysts also re­mained di­vided over the prospects of the deal. "HCL has been the canni-est of the In­dian ma­jors over the last cou­ple of years with its prod­ucts strat­egy. It has scaled up its prod­ucts busi­ness im­pres­sively, with rev­enues top­ping $1bn, of which 80 per cent is tied to IBM. Hence, this is a win-win for both firms," said Phil Fer­sht, founder & CEO of HIS Re­search. How­ever, some an­a­lysts re­mained scep­ti­cal. "It is a bold strate­gic move by HCL but is a risky one for sure," said Pa­reekh Jain, founder of Pa­reekh Con­sul­tant and ana-lyst track­ing the en­gi­neer­ing ser­vices sec­tor. "Glob­ally, there are very few com­pa­nies which are able to man­age prod­uct and ser­vices busi­ness suc­cess-fully. I think HCL has a strate-gy to spin off the prod­uct busi-ness as a sep­a­rate en­tity in the fu­ture."

Sim­i­larly, an­a­lysts are also of the opin­ion that the de­tails on amor­ti­sa­tion re­main sketchy in the man­age­ment com­men­tary. "The crit­i­cal amor­ti­sa­tion as­pect re­mains unan­swered, lead­ing to un­cer-tain­ties on ac­tual EPS (earn-ings per share) ac­cre­tion," said bro­ker­age firm Edel­weiss in a note. Harit Shah, se­nior ana-lyst at Reliance Se­cu­ri­ties, flagged con­cerns re­gard­ing the growth pro­file of the prod­uct port­fo­lio be­ing ac­quired. We are con­cerned re­gard­ing lack of clar­ity on key is­sues in­clud-ing the growth pro­file of ac­quired prod­ucts. Some of these prod­ucts are ac­tu­ally grow­ing only in sin­gle dig­its," he said in a note, adding that these IPs might not pro­vide much revenue up­side to HCL in com­ing years.

Shiv Nadar-owned IT firm says it will ac­quire nine IPs in ar­eas such as se­cure de­vice man­age­ment and mar­ket­ing au­to­ma­tion

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