HCLT’s acquisition provides entry into emerging areas
Building off its long-standing partnership with IBM, on Dec. 6 HCL Technologies (HCLT) announced the acquisition of seven IBM Software products for $1.8 billion. The acquisition, which is expected to close in February 2019, includes IBM’s AppScan, BigFix, Notes/Domino, Connections, Digital Experience (DX), Unica and Commerce as well as 10,000-plus existing clients. Each product falls into one of three focus areas: security (AppScan, BigFix); multichannel e-commerce (Commerce, Unica, DX); and collaboration (Notes/Domino, Connections). While these offerings directly tie to HCLT’s Mode 3 products and platforms, they mostly complement Mode 1 and Mode 2 services and solutions, creating the opportunity for HCLT to upsell and cross-sell new services as Mode 2 includes the company’s emerging technology portfolio offerings (i.e., Digital & Analytics, IoT WoRKS, Cloud Native Services, and Cybersecurity & Governance, Risk and Compliance [GRC]).
In August 2017 HCLT and IBM announced an expansion of their partnership, creating five IP products around automation and DevOps solutions, supported by HCLT’s $780 million investment. The partnership intended to shift HCLT’s infrastructure into emerging areas while maintaining growth. The five products developed through this extension of the partnership were included among the seven announced in the planned acquisition. HCLT’s engineering team supported the original product development and will now support the integration of the acquired assets into the HCLT portfolio as well as the development of additional emerging technologies.
Compare to peers
HCLT acquires peers that enhance and build out its core capabilities around emerging technologies. For example, HCLT acquired H&D International Group (June 2018); Butler America Aerospace LLC (January 2017); and Geometric Limited (April 2016) to improve its engineering and R&D skills. HCLT further expanded its business process services offerings and systems integration capabilities by purchasing C3i Solutions (March 2018) and Alpha Insights (September 2017); and Urban Fulfillment Services LLC (April 2017). The acquisitions also support HCLT’s shift from legacy technologies. HCLT’s planned acquisition of the product sets from IBM will elevate the security, commerce and collaboration expertise in HCLT’s portfolio. Peers such as Cognizant, Infosys, Tata Consultancy Services (TCS) and Wipro have also been executing an active M&A strategy in areas such as digital design to support transformation engagements (e.g., Wipro’s acquisition of Syfte and TCS’ acquisition of W12). Additionally, Cognizant purchased Advanced Technology Group (ATG) and SaaSfocus to add Salesforce advisory and integration services.
What does this mean for HCLT?
Pending the acquisition’s close, HCLT integrates the solutions within its Mode 3 products and platforms business and onboards new clients. Following the addition of IBM’s salesforce around these products through the acquisition, HCLT will benefit from a more seamless transition for clients currently under the IBM brand as it gains the specialists and salesforce maintaining the client relations as well as a quicker sales turnaround. Further, HCLT will focus on pursuing new client relationships using Unica, AppScan, Commerce and Big Fix to create additional revenue streams from the products formerly under the IBM umbrella. However, HCLT will seek to cross-sell the application capabilities of Domino/Notes to its existing client base.
HCLT plans to enhance Mode 1 and Mode 2 services and solutions using the acquired products by adding its security, commerce and digital marketing expertise. The products will enable HCLT to leverage a SaaS delivery model for its infrastructure management engagements, supporting the company’s shift into higher-profit software-driven services. HCLT will also improve its position within a variety of vertical markets as the products will bring existing product users, building its expertise around environment management. While the products will add SaaS capabilities, HCLT could benefit from pursuing a strategic partnership with a consulting vendor, such as PwC, or further expanding its relationship with IBM to access consulting services. The addition of services would improve HCLT’s ability to integrate the acquired products within its existing client relationships and transition clients into a different delivery model. This would allow HCLT to increase its client-facing expertise, enabling the company to work more closely with clients and coinnovate within transformation engagements. The additional client base creates the opportunity for HCLT to increase the volume of transactions and accelerate revenue growth, but HCLT will need to quickly onboard new clients and effectively communicate new offerings to transition engagements with existing clients and capitalize on the additional products and market.