HCL Tech and IBM (Part 3) More details about the deal: rationale and scope

/ December 9, 2018/ HCL Tech, IBM, India, M&A (large, with revenues above $50m), Unknown, US

We learned a bit more about the rationale of this USD 1.8bn deal under which HCL Tech is acquiring seven software products from IBM.

A diversified scope with mature and high-growth potential products

HCL is acquiring products with high potential (in security and e-commerce, especially with Unica on marketing automation), and products with a large client base and limited growth potential. In total, HCL Tech suggested it had carefully managed the scope to balance growth and access to clients. HCL said it will access now 5k additional clients globally, and bring a presence in geographies where it is under-represented. Cross-selling is, therefore, an essential element of the deal.

One has to say the rationale is not wholly satisfying: HCL Tech will get access to mostly CIOs, with relatively limited exposure to where the money is, i.e., digital (except for Unica and other e-commerce products).

What does this deal mean for the IP partnership strategy?

HCL Tech was keen to highlight that its IP partnership strategy has been successful, with four of the five IBM products growing by double digits. The added benefits of the acquisition are that HCL Tech will have full control over sales. Pre-sales and product specialists will join HCL Tech. In addition, R&D engineers for Commerce and Connections will transfer too. Finally, HCL Tech is hoping though owning the sales channel to be able to take client feedback back to development teams very effectively.

What will be the impact of the deal on ERS?

The IBM IP partnerships have significantly contributed to the revenue growth of HCL Tech’s Engineering and R&D Services unit, ERS. As part of the partnership, ERS took over the software product development of the IBM products. It is difficult to estimate how much revenues the IBM partnership brought to ERS. We are guessing somewhere around USD 250m in FY18.

Now owning the IBM products, HCL Tech will not be able to recognize these revenues as external revenues. Does this mean that ~USD 250m (and the related profits) will vanish from the revenues of ERS overnight when the transaction is completed? HCL Tech has not, as far as we know, communicated on this point.

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