HCL Tech Buys IBM Software Assets for $1.8B

Software group HCL Technologies Ltd. announced on Friday its $1.8 billion purchase of some of the software assets from computer maker International Business Machines Corp. (IBM), marking the biggest acquisition ever by an Indian IT services company.

HCL Tech will buy seven software platforms from IBM, which would help the firm attract about 5,000 customers and expand its presence in areas like commerce, security, and marketing – a more than $50 billion market prospect that HCL Tech said would help raise profits further.

The arrangement will also provide the company additional revenue of approximately $650 million in the second year of the purchase on a run-rate basis, although the sales would take about a $25 million loss in the first year.

For IBM, the agreement enables it to trim its legacy businesses as it shifts its attention to cloud computing. The US tech firm has been planning a turnaround but has struggled to do so due to a slowdown in software sales and stumbling demand for mainframe servers.

The products IBM will be selling include its secure-device management product BigFix, marketing automation software Unica and work-stream collaboration product Connections.

Following the announcement, shares of HCL Tech dropped as much as 7.7 percent on Friday to hit their lowest since July 6, before recovering to close down 4.9 percent to 961.95 rupees. The slump took some $1.5 billion off the market of the software maker founded by India’s sixth-richest person Shiv Nadar.

IBM’s stock was up 0.09 percent to $124.02 in pre-market trading on Friday.

HCL Tech Purchase Questioned

Despite being the largest acquisition ever by an Indian IT services firm, HCL Tech’s planned acquisition, has had some investors questioning the price tag in relation to the assets’ return potential.

Head of equity research Girish Pai stated that the market is grappling with the question of whether HCL has bitten too much, too early with this deal, adding that this is a bet the company is taking as a new source of growth, but this revenue stream is not going to deliver great return ratios.

Some IT analysts also expressed their confusion on the deal as they see no strategic sense for HCL over the long term since it already maintained a partnership with IBM for several 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, an Indian brokerage firm said.

Analyst Sudheer Guntupalli stated that the deal is a negative from HCL Tech’s standpoint, and that the company would need to keep investing in these products to ensure they do not become outdated.

HCL Tech brought in revenue of 505.69 billion rupees ($7.16 billion) in the last fiscal year.

The Indian software group will fund the deal through internal accruals and debt of $300 million at close and pay the majority of the transaction after the first year. The agreement is expected to close by mid-2019.

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