Based in India, has HCL Technologies stolen a march on their competition by announcing they will acquiring a significant software portfolio from IBM?

Founded by Indian billionaire Shiv Nadar’s family, HCL was the worst performer among the nation’s top 50 companies, following the announcement. The shares fell by 5% to 961.95 rupees at the close in Mumbai, while S&P BSE Sensex was the biggest gainer among Asian benchmark equity gauges.

“The market is grappling with the question of whether HCL has bitten too much, too early with this deal,” said Girish Pai, head of equity research at Mumbai-based Nirmal Bang Equities Pvt. “This is a bet the company is taking as a new source of growth, but this revenue stream isn’t going to deliver you great return ratios.”

Neerav Dalal, an analyst at Kim Eng Securities Pvt. in Mumbai shares the same concern. “The market is divided on whether it is a good thing to get into an intellectual property business, which has inherent risks and volatility. Post this deal, the IP business will contribute roughly 20% to HCL’s revenue from the current 12%.”

The multinational 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.

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Will the acquisition (eventually) pay dividends?

The software products in scope represent a total addressable market of more than $50 billion and include:

• Appscan for secure application development,
• BigFix for secure device management,
• Unica (on-premise) for marketing automation,
• Commerce (on-premise) for omni-channel eCommerce,
• Portal (on-premise) for digital experience,
• Notes & Domino for email and low-code rapid application development, and
• Connections for workstream collaboration.

(HCL and IBM have an ongoing IP Partnership, or existing licensing pact, for five of these products.)

The deal will help HCL acquire 5,000 customers, which is a task that would have otherwise taken two decades, revealed C. Vijayakumar — president and chief executive officer at HCL — on a conference call with investors.

“It’s a mix of products, some of them are cash cows and some of them will keep growing,” he said. “Some of the products will need some infusion of fresh life to allow them to grow faster.”

“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,” continued Vijayakumar.

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“The large-scale deployments of these products provide us with a great opportunity to reach and serve thousands of global enterprises across a wide range of industries and markets. I am confident that these products will see good growth trajectory backed by our commitment to invest in product innovation coupled with our strong client focus and agile product development. In addition, we see tremendous potential for creating compelling ‘as-a-service’ offerings by combining these products with our Mode-1 and Mode-2 services.”

‘A strong strategic fit’

“Over the last four years, we have been prioritising our investments to develop integrated capabilities in areas such as AI for business, hybrid cloud, cyber security, analytics, supply chain and blockchain, as well as industry-specific platforms and solutions including healthcare, industrial IOT, and financial services. These are among the emerging, high-value segments of the IT industry. As a result, IBM is a leader in these segments today,” said John Kelly, IBM senior vice president, Cognitive Solutions and Research.

“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.”

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The deal follows IBM’s acquisition of Red Hat, the second largest computer software M&A ever, according to Mergermarket data (which dates back to 1998). The technology giant is attempting to break the stranglehold on the hybrid cloud market and become a leader in this space.