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In biggest Indian IT deal, HCL Tech to buy $1.8 billion of IBM software

[December 07, 2018] By Sankalp Phartiyal and Krishna V Kurup

MUMBAI/BENGALURU (Reuters) - HCL Technologies <HCLT.NS> will buy some software assets from U.S.-based IBM Corp <IBM.N> for $1.8 billion, the companies said on Friday, marking the largest purchase ever by an Indian IT services firm.

HCL Tech will buy seven software platforms from IBM, giving it a larger clientele and allowing it to step up its presence in areas such as commerce, security, and marketing — an over $50 billion market opportunity that the Indian firm said would help boost profits.

The deal will also help HCL collect additional revenue of about $650 million in the second year of the acquisition on a run-rate basis, though sales would take a roughly $25 million hit in the first year.

Shares in HCL, which lags bigger local rivals Tata Consultancy Services (TCS) <TCS.NS> and Infosys <INFY.NS> in big data, analytics and cloud computing, tumbled as much as 7.7 percent on Friday to their lowest since July 6 after the deal was announced.

The fall knocked some $1.5 billion off the market value of the company chaired by India's sixth-richest person Shiv Nadar.

Some IT analysts said the deal did not make strategic sense for HCL over the long term because it already maintained a partnership with IBM for a bulk of the products it was buying and was overpaying for the purchase.

The products being acquired were in the middle or end of their life cycles and would likely not show more than a mid-single digit percentage growth, Indian brokerage Axis Capital said in a note.

"This deal is a negative from HCL's standpoint," said Sudheer Guntupalli, an analyst with Ambit Capital in Mumbai, adding that HCL would have to keep investing in these products to ensure they don't become obsolete.
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The IBM company logo is pictured during the Viva Tech start-up and technology summit in Paris, France, May 25, 2018. REUTERS/Charles Platiau

HCL recorded revenue of 505.69 billion rupees ($7.16 billion) in the last fiscal year. TCS, the largest listed company in India, made 1.23 trillion rupees in revenue, while Infosys raked in 705.22 billion rupees.

The company plans to fund the deal — which is expected to close by mid-2019 — through internal accruals and debt of $300 million at close and pay most of the acquisition price after the first year.

For IBM, the deal is an opportunity to further trim its legacy businesses as it focuses on cloud computing. The U.S. company has been hurt by slowing software sales and wavering demand for mainframe servers, making a turnaround difficult.

The products it is selling include its secure-device management product BigFix, marketing automation software Unica and workstream collaboration product Connections.

(Additional reporting by Vibhuti Sharma in Bengaluru; Editing by Sayantani Ghosh, Gopakumar Warrier and Sai Sachin Ravikumar)

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