Hitachi Buys GlobalLogic for USD 9.6bn. A Shock to the ER&D industry
Hitachi’s USD 9.6Bn Spending in GlobalLogic is a Shock
The Hitachi USD 9.6bn acquisition of GlobalLogic was a shock to the engineering and R&D service industry. Hitachi values GlobalLogic 37.4x its calendar 2021 adjusted EBITDA. The multiple is very high, even for a firm of the quality of GlobalLogic. Only three years ago, Apax sold its 48% stake in GlobalLogic to Switzerland-based Partners Group. At the time, the transaction valued GlobalLogic USD 2bn. Back then, the USD 2bn valuation seemed in line with the Aricent and Luxoft respective acquisitions by Altran and DXC.
There is no question that GlobalLogic is a quality asset. The company has grown 20% annually in the past years. It has an adjusted EBITDA margin of ~23%. Its revenues in the financial year ending March 31, 2021, will be USD 921m, up 19.3%. During the pandemic, GlobalLogic benefited from its positioning in Silicon Valley and its limited exposure to automotive and aerospace.
Lumada Groups Mostly Software Businesses
Hitachi believes GlobalLogic will suit its Lumada business unit, which comprises its data and analytics software products (Vantara) that resulted from the combination of Hitachi Data Systems, Hitachi Insight Group, and Pentaho. Lumada also includes an IoT platform and AI-based use cases around maintenance and monitoring aligned by sector.
GlobalLogic brings consulting, product design, and engineering service capabilities to Lumada’s software and sensor products at a high level. Meanwhile, Lumada positions GlobalLogic further in the connected device and IoT use cases for numerous industries (e.g., smart city/water/manufacturing/healthcare/energy). However, we think that fundamentally mixing software products with ER&D will not work. The two businesses are too different and rely on different business models. We think commercial synergies are limited. Managing such a diverse set of businesses will be difficult.
Hitachi pointed out that it is driving software and cloud in its various units, e.g., energy, industry, mobility, smart life, and Hitachi Astemo (automotive systems). Yes, products across industries have an increasing level of chips and software. However, to drive its product softwarization, Hitachi did not need to buy GlobalLogic. Engaging GlobalLogic in various projects was enough.
GlobalLogic Is A Transformational Acquisition for Hitachi
This is not over yet. Once Hitachi completes the GlobalLogic acquisition by the end of July 2021, it will sell approximately USD 20bn in its portfolio companies. Hitachi wants to focus on growing businesses and also reduce its net debt quickly. In other words, GlobalLogic is a big transformational acquisition, as far as Hitachi is concerned.
You probably guessed that we don’t understand the rationale for this acquisition. And the price is out-of-control. Stay tuned, we will keep on investigating.