HCL Technologies’ acquisition of seven of IBM’s flagship software products represents an amalgamation of offerings – some of which promise a steady cash inflow. The others project considerable growth potential and align directly with HCL’s multi-pronged strategy to grow its “products and platforms” business.
Describing the deal as a win-win for both HCL and IBM, Information Services Group (ISG) Partner and President Steven Hall considers this an opportunity for HCL to gain access to key clients as a way to position their broader offerings. The deal also gives HCL an opportunity to integrate key products into its solutions.
“IBM Connections, Notes and Domino will fit very nicely into HCL’s Workplace of the Future and builds on HCL’s investments in the business application space and low-code development,” Hall said “It’s easy to see an enhanced Workplace of the Future offering integrated with business applications and targeted to specific vertical solutions.”
On the other hand, the sale gives IBM the opportunity to focus on core technology areas such as AI, analytics, cognitive, blockchain and open source hybrid cloud. An existing IP partnership between the two companies, established in 2016, gives HCL a head start to integrate products, including those, such as AppScan, where it already had the source code.
In addition, “divesting these products will help IBM’s focus as they absorb RedHat and the US$1.8 billion will help their overall cash flow and debt position,” Hall noted.
Probable benefits for HCL
- The deal has strengthened the relationship between IBM and HCL and can be viewed as a strategy toward reinforcing HCL’s productized, IP-driven approach to drive its growth. This partnership can be leveraged by HCL further when the company plans to venture into a new market where IBM has a predominant presence.
- Commerce and Unica will enable HCL to enter the marketing and content management space. HCL can emerge as a strong competitor to similar service providers already offering products in the space, such as such as Cognizant, through its digital experience and content marketing offerings.
- The acquisition of Notes, Connections and Domino product lines is likely to be integrated within HCL’s existing workplace and infrastructure offerings. The ownership of these IBM products will enable HCL to strengthen its portfolio and make its offerings more comprehensive. Furthermore, with the reinforced portfolio, HCL will be ideally positioned to deliver solutions in areas like workplace collaboration.
Possible concerns
HCL reported a trailing twelve months (TTM) revenue of US$8.2 billion, and the product line acquisition deal with IBM comes at a cost of approximately 22 percent of its revenue. Though HCL recognizes a total addressable market worth of US$50 billion for the acquired products and an annual return of US$625 to $650 million in 2019 and onwards, some of the possible reasons for concern are:
- Most of the acquired products are matured products with plateaued growth.
- HCL would need to realign the business models associated with the acquired IBM products. While the acquisition of BigFix and AppScan can enhance HCL’s security offerings noticeably, it may take some time for HCL to achieve the required synergy between the acquired capabilities and its own offerings. This, in turn, can impact the overall go-to-market strategy.
Key take-away
HCL intends to create ‘as-a-service’ offerings by combining the acquired products with its Mode 1 offerings (application, development and maintenance and infrastructure services) and Mode 2 offerings (digital technologies, automation and AI). However, HCL should consider the following strategic actions:
- Make products more “IBM-agnostic:” Some of the acquired IBM products will require a considerable rebranding investment because they were run in IBM’s environment and are more famously known as IBM’s brand. HCL will need to work to make these products recognized more as an HCL offering than an IBM offering, and it will want to make them more versatile to run on any environment.
- Minimum disruption for existing clients: The offloading of clientele and resources along with the mentioned product portfolio signifies IBM’s intent to leave these product categories. HCL, accordingly, should establish a solid support infrastructure to ensure minimum disruption for existing clients, repackage the products and blend them with its own services in a seamless way.
Overall, the acquired products can prove to be a substantial strategic fit for HCL’s growth plan once the synergy between its existing service lines and the acquired capabilities is achieved.
