HCL Technologies taking more risks over product play, say experts

Say it needs long-term commitment of resources to develop successful products from acquired IPs of IBM

As HCL Technologies (HCLT) takes a strategic bet towards a bigger product play, experts are sceptical about the move saying this involves more risks than rewards unless the company is able to develop successful products out of the acquired (intellectual properties) IPs from IBM.

IPs as such are not products in itself and require dedicated efforts in terms of resources and time to take shape in collaboration with system integrators. The Noida-headquartered firm has to make long-term commitment of both financial and human resources to realise this goal.

"Software investments are large and require investors which are patient and committed. Typically, these investors are different from those who invest in service firms who have low investment intensity," said Peter Bendor-Samuel, founder and chief executive officer of global research firm Everest Group.

"To succeed, HCLT will need to adjust their governance and do a lot (in terms of) educating their key investors," he said. 

On Friday last week, HCLT announced it would acquire select IPs from global technology giant IBM in a deal valued at around $1.8 billion, making it the largest acquisition in the domestic IT services space.

The acquired IPs relate to areas such as secure device management, marketing automation, omnichannel e-commerce, and digital experience among others and have a market potential of more than $50 billion, the company has said.

However, analysts said most of these IPs had passed their prime and would require serious efforts to turn them cash cows for the IT services firm.

"Given the access to low-cost labour, HCLT will be able to enjoy strong cash contributions for some time. However, once the initial growth impact is over, a potently shrinking market for these assets will create a drag on overall growth of the IT firm," Bendor-Samuel of Everest Group said.

According to Hansa Iyengar, senior analyst at London-based Ovum Research, some of the acquired IPs were more than 20 years old and IBM was losing money from this portfolio of products, prompting it to divest.

"IBM needs to get rid of some of the 'weight' it is carrying of legacy products such as Notes. IBM is bleeding more cash than its making (from this portfolio),” Iyengar said.

“Some of the products are almost 20 years old and IBM's current strategic focus requires it to focus on those products that are relevant for its future roadmap,” she added.

Globally, many technology companies are not successful in managing both products and services business under one roof. 

“Software and services business don't always work together. Hewlett-Packard (HP) acquired Autonomy for more than $10 billion but had to split it into four units later,” said Pareekh Jain, founder of Pareekh Consultant and analyst tracking the engineering services sector.

He said there were very few companies who had a successful hardware and services business as global technology majors such as Dell, Xerox and HP, which had acquired services business of Perot, ACS, and EDS, had to sell them off.  

HCL has put in place an aggressive IP-led growth strategy, investing as much as $1.1 billion in buying product licences and IPs from companies such as IBM and DXC Technology over the past couple of years. 

The IT services firm has also done 10 acquisitions in the last three years itself. In the ongoing fiscal so far, the company has spent around $359 million towards acquiring three firms — H&D International Group, C3i Solutions, and Actian Corp.