In what will become the largest purchase by an Indian software services company, Shiv Nadar-promoted HCL Technologies said Friday it will acquire seven software products from US-based tech major IBM for $1.8 billion in an all-cash deal. Even as HCL Tech said that the acquisition will add to its portfolio segments such as marketing, commerce, security and collaboration, along with a “highly profitable revenue stream” and access to over 5,000 large clients, the market perceived the deal to be negative for the company. After falling nearly 8 per cent during intra-day trade, HCL Tech’s scrip ended Friday’s trading nearly 5 per cent lower from its previous close.
India’s third largest IT company — HCL Tech — said that the cash deal will be funded largely through internal accruals, with $300 million of debt, adding that nearly half of the total amount will be paid at close of the deal. Analysts believe that the continuous investment that the acquired products demand is what is negative for the company. “This deal is a negative from HCL’s standpoint,” Sudheer Guntupalli, an analyst with Ambit Capital in Mumbai was quoted by Reuters as saying. He added that HCL would have to keep investing in these products to ensure they don’t become obsolete. In a note, brokerage Axis Capital said that 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.
The software products in the deal include Appscan (for secure application development), BigFix (for secure device management), Unica (for marketing automation), Commerce (for omni-channel eCommerce), Portal (for digital experience), Notes & Domino (for email and low-code rapid application development), and Connections (for workstream collaboration). The seven products represent a total addressable market of $50 billion, and are expected to help HCL Tech rake in additional revenue of about $650 million in the second year of the acquisition on a run-rate basis.
For the July-September quarter, HCL Tech’s revenue in dollar terms rose 2.1 percent to $2.09 billion, while in constant currency terms it was up 3 percent at Rs 14,860. The company’s net profit was at Rs 2,534 crore during the three-month period ended September, up 4.2 percent from the preceding quarter.
HCL and IBM have an ongoing intellectual property partnership for five of these products.
“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,” said C Vijayakumar, president & CEO, HCL Technologies.
John Kelly, IBM senior vice president, Cognitive Solutions and Research, said: “We believe 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.”
The Noida-headquartered software services company expects the transaction to close by mid-2019, subject to completion of applicable regulatory reviews.