India’s third largest software services firm HCL Technologies announced it had acquired select IBM software products across marketing, security and commerce for $1.8 billion. Also, HCL Technologies had already signed IP-partnership for five of the acquired products over the past two years for $1.2 billion. It is an attempt to bolster its products and platform portfolio and is also dubbed as the Mode 3 portfolio but the question is — will the acquisition pay off ?

Why HCL Decided To Buy IBM Products ?

• One of the top reasons is to bolster its product portfolio and reduce the dependencies on external vendors. By acquiring these much needed softwares, the large-scale operations of these products will provide HCL a great opportunity to reach and serve thousands of global enterprises across a wide range of industries and markets.
• Tech analysts point out that this acquisition also opens the door for cross-sell opportunities: by providing HCL access to thousands of top of the line enterprises that use IBM products.
• Also, these products have the capability of showing good growth trajectory backed by HCL ‘s commitment to invest in product innovation coupled with their strong client focus and agile product development in future.
• With this acquisition, HCL will be able to create a compelling ‘as-a-service’ offerings by combining these products with their Mode-1 and Mode-2 services that they provide.
• IP Partnership for five of these products between HCL & IBM will help in clearing backlog of tickets, significantly strengthen the client relations and also break into new technologies like such as containerization.
• Also, one of the primary reasons for this acquisition is that HCL have been prioritising its investments towards developing integrated capabilities in areas such as AI for business, hybrid cloud, cybersecurity, analytics, supply chain and blockchain as well as industry-specific platforms and solutions including healthcare, industrial IOT, and financial services as these are among the emerging, high-value segments of the IT industry and as IBM is a leader in these segments today, acquiring these softwares is about to boost and aid them in their focus towards driving innovation and growth for their customers through these segments.
• This deal is going to help HCL in acquiring 5,000 customers which is a task that would have otherwise taken them two decades. HCL views these acquisition as a mix of products out of which some are cash cows and some have the potential to become revenue-generators.

Sectors In Which These Products Will Help HCL

The software assets that HCL is acquiring from IBM are increasingly delivered as stand-alone products only. The software products in scope represents a much bigger addressable market than its standalone value such that it can help HCL in multiple sectors for in the larger growing market areas like security, marketing and commerce viewed as strategic segments for HCL. Many of these products are also well regarded by clients and positioned in the top quadrant by industry analysts.

Here are the 8 products that HCL acquired from IBM – 

1. Appscan (secure application development)
2. BigFix (secure device management)
3. Unica (marketing automation)
4. Commerce (omni-channel eCommerce)
5. Portal (digital experience)
6. Notes & Domino (email and low-code rapid application development)
7. Connections (workstream collaboration)

Industry’s Outlook On The $ 1.8 Billion Deal

 Downside:

• Equity researchers in Nirmal Bang Equities Pvt are of the opinion that even though the company is betting big on the acquisition viewed as a new source of growth, the revenue stream isn’t going to deliver greater return ratios as expected.
• According to analysts at Kim Eng Securities, the market is divided on whether it is a good thing to get into an intellectual property business, which has inherent risks and volatility. Even though, post this deal, the IP business will be contributing roughly 20% to HCL’s revenue from the current 12%.
• The Indian tech giant will borrow $300 million to fund the deal, while the remainder will come through its profits. Investors have questions about HCL Tech’s ability to scale up the products business.
• According to Nomura Research, though the IBM deal gives it headway, HCL Tech will have to market the product and build a sales team which is not easier to be do. HCL Tech may even step up investments in sales and brand development.
• Also, HCL’s capabilities for product sales are untested and HCL will be handicapped in tapping new clientele in competition with entrenched software vendors.

 Upside:

• If HCL Tech succeeds in product platform investments, then the company can emerge as a bigger end-to-end solutions provider.
• According to HCL, there will be an expected incremental revenue of $650 million on a run-rate basis in year two after the close and at the same time in year one, the same is expected to be $25 million lower due to transition in later year.
• HCL Technologies future road map also maintains that it is taking steps in innovating with new technologies, such as AI and Machine Learning that can change the way products are used and simultaneously create a cross-sell with “as-a-service” model.
• At the same time, it cannot be denied that these products are a strong strategic fit for HCL and HCL is well positioned to drive innovation and growth for their customers as it is in the business of providing credit cards, payments, cash management, corporate lending, consumer lending, core banking, risk management, financial accounting and treasury management solutions to banks.