Very little biz overlap between HCL and Geometric: Parpia

The acquisition of Geometric by HCL Technologies has a lot of synergies as both companies have little overlap in terms of business, says Geometric founder and CEO Manu Parpia."It is a complementary deal in terms of clients and skill-set," he told CNBC-TV18 in an interview. The current management structure, will have to fit in with the HCL structure and the Geometric hopes that it will fit in well. He also added that HCL has been very clear on keeping and sustaining Geometric's employees.CNBC-TV18 also spoke to PhillipCapital IT Analyst Vibhor Singhal who discussed the implications of the deal.Below is the transcript of Manu Parpia’s interview with Kritika Saxena on CNBC-TV18.Q: You have had a long board meet yesterday. We have the details of the deal. You have split the deal into two, one is the Geometric business that will be merged into HCL Tech, and one is 50 percent stake that is going to be sold to Dassault Systemes. Can you break up the reason as to why you split the business into two instead of selling it to one shareholder?A: Let us look at what is the interests of each party and so on. To HCL, the value of Geometric is from the customer base, the specialist employees that we have and how to leverage it. And if you look, there is a very little overlap between the two.Q: You mean in terms of client overlap?A: In terms of client, in terms of even skill sets. So, a very complimentary deal, truly complimentary. HCL is strong in embedded, strong in software engineering, Geometric is strong in PLM, in manufacturing engineering, little bit of product engineering. So, very little overlap. In terms of clients, very little overlap. Geometric is strong in automotive, almost 50 percent of the business that is being transferred is in automotive and it will complement HCL's strengths. So, it is a great deal for the employees and it is a good deal for the HCL shareholders. The IP that Geometric brings to the table can be leveraged across the HCL customer base.If you look at what is of interest to Dassault Systemes and the employees of that, it was that they wanted to protect their end of the business – it is 58 percent, it is sort of captive. If you look at it overall it ends up with further 3Dplm Software Solution Ltd which is the name of the subsidiary employees. They get a future and career growth. The business model that was there in 3Dplm has kind of reached, I will not say the end, but has reached a plateau and if you see the growth of 3Dplm, it has tapered in the last couple of years. So, it works out in the best interest of both parties, all three parties actually HCL, Geometric and Dassault Systemes. So, you can imagine it is a bit complex to manage but it works in the right way and for the shareholders of Geometric it is a very good realisation, if we look at the split that HCL brings to the table for every 43 shares of Geometric you get 10 shares of HCL. So, values about Rs 190 per Geometric share, ball park, plus or minus.If you look at the Dassault side of the deal it brings about Rs 68 per share. So, it kind of is a good transaction and it is a great win for HCL because it really will allow them to be uniquely positioned in the world. I truly believe that. Because if you see other engineering services providers they are skilled in either, in a way like HCL used to be in embedded or in software engineering but not having PLM, not having manufacturing. Now you actually get the full spectrum or much bigger part of the spectrum and this is very valuable because what you are seeing is in the world the integration of all these elements is taking place and to be able to have skill sets of a couple of them is truly unique.Q: You spoke about realisation. So, if you combine both the deals, what is the overall average realisation that shareholders get?A: If you look at it, it is about Rs 190, it depends how you value the 10 to 43 swap. It is about 190 and about Rs 70 or Rs 68 per share. So, I would say it comes to between Rs 255 and Rs 260 per share.Q: In terms of realisation specifically?A: Yes.Q: Let us breakup the business. Specifically, what are the revenues or last reported revenues for the Geometric business that is being sold to HCL Tech and 3Dplm?A: We have not reported this quarter’s but I would say it is between Rs 135 million and Rs 140 million for Geometric and about Rs 50 million ballpark for 3Dplm, that is the combined revenue of the two. 3Dplm is a captive, a single customer though it has a subsidiary 3D Global Services, but that is very small. So, it is a single customer captive and the other is of course with the full sales force and so on.Q: In terms of margins and cash flows what is the picture as far as business in HCL Tech is concerned and 3Dplm?A: You saw our margins last quarter, so I am not in a position to talk about. But overall higher in 3Dplm because of the business model but the risk is higher in 3Dplm because you have a single customer. So, it is a trade off.Q: What about the overall cash flows on books right now?A: I don't have the exact figure. When you look at a deal, when you look at the value that you derive, you typically look at the margins that the business is capable of producing. Cash is just an adjustment figure that takes place at estimate at the end. So, I don't think cash is that relevant, it is the value of the business. I really focused on the value of the business which is what I think it is.Q: Let me ask you about the HCL Tech takeover. Geometric and HCL Tech will be merged together, take me through the final shareholding  after the merger is completed? Take me through the shareholding  that Godrej  group will have, that you will hold and that HCL Tech will have?A: Honestly, I have not thought it through. But I think we are less than 1 percent, well less than 1 percent of HCL’s existing market capitalisation.Q: So you will be completely exiting in terms of shareholding from the merged entity?A: Yes I will get shares of HCL.Q: Combined your shareholding as well as Godrej group they will hold less than one percent?A: Yes.Q: In that case, is there a lock-in that you have for your shares or for Godrej shares in that case?A: I believe that there is no lock-in.Q: In that case what is the timeline that you are looking at? There are approvals that have to be in place, there are approvals  with regards to court approvals in both the cases. So, what is the timeline that you are looking at?A: Timeline is going to be 6-9 months, I am advised. There is a whole bunch of regulatory approvals that need to take place plus the court approval. I am told 6-9 months. During this period it is my role to run Geometric for its existing shareholders in a responsible and steady manner. So, that is my priority to actually ensure that I deliver value.The way to deliver value even for the incoming shareholder is for me to do a good job for the existing shareholders. So, actually my role I look at it is to grow the company, sustain the margins and carry on in almost the same way as if I would carry on if the company was not going to be acquired.Q: So, you will be exiting completely in terms of operations once HCL Tech deal is completed?A: Yes. Q: What about the current management and employee base? Will they be immediately absorbed because you have overall 4,800 employees split into two. So, there is 2,000 going to 3Dplm?A: Ballpark, yes.Q: And the remaining will come to HCL Tech. So, what happens to the employees and the current management structure as well?A: Current management structure, I cannot comment on, because obviously, it has to fit in with the HCL structure and I would hope it will fit in with the HCL structure. When I say it will fit in, it shouldn't remain identical because it must merge and for HCL to deliver value to its shareholders they need to make sure that it is merged properly. What will happen to the employees actually I think will be a much bigger opportunity. HCL has been very clear, they are very keen on keeping and sustaining our employees because that is part of the reason. What is the reason for acquiring Geometric? It is for customers and talent. So, it is in their interest and I believe them that they want to sustain and grow.So, we will ensure that we build a future for our employees together and we show them the path for a better career and also show the path to our customers.Q: So, there is a commitment because every time a deal happens the one thing that employees question of the acquired company is if their jobs are steady? A: I would tell you as a founder to me employees are key. For me as I structured this deal what has paramounted my mind was what is good for the employees because people have stuck by the company and done their best. So, if you look at the transaction and you ask me why it was split? Part of the reason for it being split is what is good for the employees. So, for the employees of 3DPlm the best solution was to be part of Dassault Systèmes and for the employees of  Geometric the best solution is to be part of a bigger enterprise where they have opportunity to grow.So, I really  felt that this was a honestly the best possible deal  we could think of  from the employees perspective.  I am not saying there couldn’t be something fancy and better but that was my driver. Obviously there are shareholders so you have to look at shareholders drivers and I had to marry the two and that was the challenge.Q: If you break up the business further take me through the financial contours of the Dassault deal in that case. In terms of the preferential shares that have been allotted what is the kind of returns that the Godrej Group will get and that you will get as a result of the deal with Dassault?A: First let us be very clear whatever returns we get all shareholders get. There is no difference in any way to the realisation per share whether it is a regular shareholder or a promoter. In fact I would say the promoters are at a disadvantage because we have had to give indemnities to both HCL and to Dassault Systemes. So, we are actually at risk as compared to any other shareholder.Having said that in the case of the Dassault deal they get redeemable preference shares, every shareholder will get redeemable preference share worth Rs 68 because this is taken on fully diluted both the HCL deal and Geometric whatever options there are and so on. These will be redeemable in 15 months but every quarter they would be redeemable at the choice of the shareholder and they are going to be listed. So, there is liquidity even in those redeemable preference shares in two ways, one you can sell it or B, you can redeem it.Q: Is there a link wherein HCL Tech would be able to get access to Dassault as a client?A: Dassault Systemes as I know their strategy is when moving more and more into working with system integrators. So, I hope I can good my good offices to be able to bring the two companies together in a business way which will benefit the customers HCL and Dassault. That is work in progress at this stage. I can't say how successful we will be but that is part of my role. I would say to deliver value to incoming shareholders that is HCL.Q: What is the kind of scalability models from the current client base and you have a sense of the merged entity as well. What is the scalability model that the merged entity can get and the kind of market share that they can receive thereby?A: So, if I look at Geometric's client base which consists in automotive of almost all the top OEMs in the world which we are obviously very proud about. We do very little embedded business with them in embedded systems. So, HCL's strength is in that. So, I can imagine that we can take that embedded strength and address our existing customer base with that, I see that. And embedded is electronics, say in the auto industry is growing from 20 to 35 to almost 50 percent of the value of a car. So, that is the business side that Geometric has been unable to tap even though that is the strongest segment. So, it is a great opportunity where we can derive value in our existing customer.Q: What has been the response from the clients so far?A: Actually without exception have been very positive.Q: Geometric has been your baby since 1984. You have had over the last few years many likely prospective suitors, why is HCL Tech the best bet for Geometric?A: If I look at HCL Tech's ethos in terms of  how it works with its customers, Shiv Nadar is quoted as saying people do business with people. If you look at Geometric's ethos, it is people building partnerships. I think the ethos of the companies very much marry. Geometric is still a entrepreneurial company. HCL prides itself on entrepreneurs and a programme which they run. I think there is a lot of commonality in that. In addition to the business part of it which I have already talked about, I think the ethos of the companies has a lot of commonality. I respect the strong sales capability  that HCL brings to the table which is an area where Geometric has not been that successful. So, I think it is a great win. I am really happy that it will be part of a good company.Q: Was it difficult to pull out off Geometric and make this decision?A: If you are talking on a personal basis it is not because I retired, I was away from being the CEO for four and half years and that was good. On a very personal basis I believe that different people are good for different things.I have always maintained my strength and my weaknesses. I think that it is good that somebody will take over from me and do a better job than I can. I am really happy with that.