HCL Tech and IBM (Part 4) A right move?
The USD 1.8bn HCL Tech deal is undoubtedly impressive and does raise many questions about the IP and software products strategy of HCL Tech. We have commented several times on this strategy. Here are our thoughts:
- HCL Tech reaches 20% threshold. We estimate that HCL Tech will not derive ~20% of its revenues from IP and software products. HCL Tech is in the space where it can benefits from the potentially high margins of software products while remaining, for the most part, an IT service business. The company should escape the negatives of being an ISV, e.g., high seasonality with calendar Q4 being the most active quarter; and high upfront investment in R&D.
- The product portfolio of HCL Tech is very diversified and comes across middleware (including Actian), collaboration applications (Lotus, Domino, Connections), security (BigFix, Appscan) and e-commerce (Unica, Portal, Commerce). This is a broad portfolio that is heterogeneous
- HCL will have a debt of USD 300m, once the transaction is completed. This leaves space for acquisitions in digital, to expand the client base of HCL Tech from CIOs to the lines of business
- A pause in software product acquisition is needed. HCL Tech still needs to show it can resume its organic growth in its Application Services and BPO businesses.
Finally, HCL Tech has the boldest and most innovative strategy in the industry, among peers in India and onshore. Bold means innovative but also risky.