HCL makes India’s biggest IT services acquisition

HCL to acquire select IBM software products for $1.78 billion

HCL Technologies on Friday announced the acquisition of select IBM software products for a whopping sum of $1.78 billion (over Rs 12,500 crore). This Is the biggest acquisition in India’s IT services sector, and the 10th largest in India’s corporate history.

The company expects the transaction to close The transaction is expected to close by mid-2019. Prior to this deal, Tech Mahindra's acquisition of Satyam Computers in 2012, was the largest acquisition in India's IT space -- worth $1.4 billion, data provided Grant Thornton revealed. This is also the second big acquisition by HCL, after acquiring Actian Corporation earlier this year for $300 million.

In an all-cash transaction, 50% of the transaction will have to be paid at close. The transaction is funded largely through internal accruals of the company along with $300 million (over Rs 2,000 crore) of debt.

The gamut of the software that Noida-based HCL has acquired, include Appscan, BigFix, Unica, Commerce, Portal, Notes & Domino and Connections. The acquired products represent a total addressable market of more than $50 billion (Rs 3.53 lakh crore).

All the products acquired by the company are among the top three of in their respective market segments, except for digital commerce app - Commerce and low code product - Domino. The highest addressable market to HCL Technologies enterprise collaboration product, Connections, worth $34.7 billion (Rs 2,45,242 crore). The enterprise collaboration market has been growing at about 11.6%, over past years.

The transaction is expected to give HCL access to the global customer base with substantial revenue from the US, Germany, Japan, France, and the UK. The transaction is expected to give HCL access to more than 5,000 large clients across a wide range of industries and geographic markets, along with sales and marketing teams.

“The products that we are acquiring are in large growing market areas like Security, Marketing and Commerce which are strategic segments for HCL.” said C Vijayakumar, President & CEO, HCL Technologies.

At the end of the September quarter, HCL’s cash reserves stood at $218.2 million, while its debt stood at $388.6 million. The second quarter term debt for the company saw a spike of about $355 million from $33.3 million in the quarter ended June 30, 2018.

“Over the last four years, we have been prioritising our investments to develop 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. These are among the emerging, high-value segments of the IT industry,” said John Kelly, IBM senior vice president, Cognitive Solutions and Research.

Even as the deal is expected to consume $3.8 billion of the company's current assets, yet analysts are don't think that it will impact its liquidity. "If these assets are cash flow positive, which they seem to be as of now, then it's a great move. Now depends how much HCL is able to leverage this path-breaking deal," an analyst said.

Some other experts believe that mergers and acquisitions of new and emerging technologies are the way ahead for Indian tech companies. "Indian IT space is going through a transformation phase and the mergers and acquisitions in the newer technologies are a key going ahead,"Raja Lahiri, Partner, Grant Thornton India said.

Many other experts believe that this IBM's acquisition of Redhat might have been propelling factor behind this transaction.

Meanwhile, company's stocks tumbled by 5.02% in the morning trade and closed at Rs 961.2 per scrip on BSE.

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