HCL Tech­nolo­gies to buy IBM as­sets for $1.8 bn

Hindustan Times ST (Jaipur) - - World - Reuters feed­[email protected]

MEGA DEAL IT ser­vices firm will buy seven soft­ware plat­forms from IBM, giv­ing it a larger clien­tele and al­low­ing it to step up its pres­ence in com­merce, se­cu­rity and mar­ket­ing

HCL Tech­nolo­gies Ltd will buy some soft­ware as­sets from US-based IBM Corp. for $1.8 bil­lion, the com­pa­nies said on Fri­day, 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 In­dian firm said would help boost prof­its.

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

Shares in HCL, which lags big­ger lo­cal ri­vals Tata Con­sul­tancy Ser­vices (TCS) and In­fosys in big data, an­a­lyt­ics and cloud com­put­ing, tum­bled as much as 7.7% on Fri­day to their low­est since July 6 af­ter the deal was an­nounced.

The fall knocked some $1.5 bil­lion off the mar­ket value of the com­pany chaired by In­dia’s sixth-rich­est per­son Shiv Nadar.

HCL will bor­row $300 mil­lion to fund the deal, while the re­main­der will come through its prof­its. The trans­ac­tion is ex­pected to close by mid-2019, ac­cord­ing to a state­ment.

Some IT an­a­lysts said the deal did not make strate­gic sense for HCL over the long

MUMBA/BENGALURU: HCL WILL BOR­ROW $300 MN TO FUND THE DEAL, WHILE THE REST WILL COME FROM ITS PROF­ITS. DEAL IS LIKELY TO CLOSE BY MID-2019

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, In­dian bro­ker­age Axis Cap­i­tal said in a note.

“This deal is a neg­a­tive from HCL’s stand­point,” said Sud­heer Gun­tu­palli, an an­a­lyst with Am­bit Cap­i­tal in Mumbai, adding that HCL would have to keep in­vest­ing in these prod­ucts to en­sure they don’t be­come ob­so­lete.

HCL recorded revenue of ₹50,569 crore ($7.16 bil­lion) in the last fis­cal year. TCS, the largest listed com­pany in In­dia, made ₹1.23 lakh crore in revenue, while In­fosys raked in ₹70,522 crore.

The com­pany plans to fund the deal—which is ex­pected to close by mid-2019—through in­ter­nal ac­cru­als and debt of $300 mil­lion at close and pay most of the ac­qui­si­tion price af­ter the first year.

For IBM, the deal is an op­por­tu­nity to fur­ther trim its legacy busi­nesses as it fo­cuses on cloud com­put­ing. The US com­pany has been hurt by slow­ing soft­ware sales and wa­ver­ing de­mand for main­frame servers, mak­ing a turn­around dif­fi­cult.

The prod­ucts it is sell­ing in­clude its se­cure-de­vice man­age­ment prod­uct Big­Fix, mar­ket­ing au­to­ma­tion soft­ware Unica and work­stream col­lab­o­ra­tion prod­uct Con­nec­tions.

MINT

The deal will also help HCL col­lect 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

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