On December 8, 2018, HCL Technologies announced that it is acquiring select IBM software products for $1.8bn. The company will use $1.5bn of cash from its balance sheet and borrow the rest $300m to finance the transaction. This will be the largest acquisition done by any Indian IT services firm till date – other large transactions are Tech Mahindra’s acquisition of Satyam Computer Services for $1.23bn and HCL Technologies’ acquisition of Axon Group for $731m. The transaction seems to be a culmination of HCL and IBM’s IP partnership, which has been in place since 2016. Also, it is in line with HCL’s recent push towards building a products and platforms portfolio, and will help IBM to focus more on its new interest in hybrid cloud and cognitive solutions businesses.
The product portfolio to be acquired by HCL includes Appscan for secure application development; BigFix for secure device management; Unica (on-premise) for marketing automation; Commerce (on-premise) for omnichannel e-commerce; Portal (on-premise) for digital experience; Notes & Domino for e-mail and low-code rapid application development; and Connections for workstream collaboration.
The companies have not disclosed the revenue attributed to these specific products for the last year. However, HCL expects to generate $625m in incremental revenue in the year after completion of this deal. This represents a 2.84x forward sales multiple for the transaction.
Most of the recent software product deals have been garnering high sales multiple of over 6x sales, with many fetching double-digit multiples. However, these are typically SaaS-based products that generate high recurring revenue. Considering that HCL is acquiring the legacy on-premise software portfolio, the lower valuation multiple seems justified.
The transaction is in line with HCL Technologies’ strategy of focusing on its ‘products and portfolio’ business, which represented $250m (11.9%) of its revenues in July-September quarter. It will also allow IBM to focus on the hybrid cloud and cognitive solutions businesses, in which it has been investing heavily during the past few years.
HCL Technologies is expecting that the software product portfolio will add $650m in annual revenues to the company. Also, HCL will add c.5,000 clients to its existing customer base, to which it can cross sell its other services and enhance its existing business.
Also, HCL aims to combine these products with its existing Mode-1 (application development and maintenance) and Mode-2 (emerging digital technology) services and create ‘as-a-service’ offerings to generate recurring revenue.