Why HCL-IBM Deal Is Failing To Excite Investors

Investors in the Shiv Nadar-controlled fourth-largest Indian IT services provider, HCL Technologies Ltd, were not enthused with its Friday announcement that HCL Tech will buy select IBM software products for $1.8 billion. HCL Tech shares fell as much as 7.60%, on a day the BSE IT Index traded lower and Sensex was higher.

However, HCL Tech’s decision to acquire software from IBM as part of its attempt to be IP-driven and drive growth on back of it may be “good in theory, and the bold move is a step in the right direction, but the ground reality is that these products come with a ton of baggage that can potentially throw a spanner in the works”, according to Sanchit Vir Gogia, chief analyst, founder and CEO of Greyhound Research, a market research and analysis firm.

Gogia argues that most of the products in the HCL-IBM deal have been sold “as part of a large Strategic Outsourcing or a Managed Services deal and not as independent products”. This implies that so far these products “have been sold on back of the solid relationship with IBM, existing services contracts and most importantly, the ability to covert CAPEX (capital expenditure) to OPEX (operating expenditure) thanks to IBM’s financing arm”.

“When sold independently, HCL Technologies will need to add ammunition in terms of integrations with other key third-party providers, soft licensing measures, the ability for these products to work across multiple cloud providers and most of all, the arms and legs to allow for easy deployment and ongoing management,” says Gogia. He believes “HCL Tech can turn the deal in its favour if it offers concrete guidance on its commitment to code and R&D overall”.

[HT Mint]

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Analyst:

Sanchit Vir Gogia: Sanchit is the Chief Analyst, Founder & CEO of Greyhound Research, an award-winning global research & advisory firm. To read more about him, click here.

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