HCL Tech completes the acquisition of IBM software products

/ July 3, 2019/ HCL Tech, IBM, India, M&A (large, with revenues above $50m), Software Products, US

HCL Tech has closed the acquisition of several IBM products. The company has now ownership of AppScan, BigFix, Commerce, Connections, Digital Experience (Portal and Content Manager), Notes Domino, and Unica. We assume the price of the transaction has not changed and still is USD 1.8bn.

HCL Tech has also introduced a new business unit, HCL Software, which is responsible for its software products, i.e., the IBM products, DRYiCE (AI and RPA tools), and database ISV Actian. HCL will report HCL Software as part of Products and Platforms.

This is the largest M&A of HCL Tech and of any other Indian IT service vendor, ever. We reiterate our view that this is a bold move that shifts the business model of HCL Tech towards software products. HCL Tech will not have to live with a business model in HCL Software that is very different, in terms of seasonality, profit margins, upfront investment than IT services.

From an ER&D services perspective, we are expecting the software development work that HCL Tech was billing to IBM to become internal R&D expenses and no longer be reported by HCL Tech’s ERS unit as to external revenues. In all likelihood, the growth of ERS revenues should, therefore, converge to that of the market, to 10%-15%, assuming HCL Tech does not make further acquisitions or signs new IP partnerships.

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