HCL Technologies-IBM deal fails to enthuse investors

(Image: HCL)

HCL Technologies acquisition of some IBM products for a whopping $1.8 billion failed to enthuse investors as the market awaits greater clarity on the contours of the deal.

The stock fell as much as 7.6 per cent after the deal announcement.

Analysts and industry watchers feel HCL will have to add significant capacity to be able to sell these products without the IBM banner.

"It is important to note that most of these products have been sold on the back of the stable relationship with IBM, existing Strategic Outsourcing or a Managed Services contracts and the ability to convert capex (capital expenditure) to opex (operational expenditure) thanks to IBM's financing arm," said Sanchit Vir Gogia, CEO at research firm Greyhound Research.

The deal, which is the biggest ever by an Indian IT services provider, seeks to capitalise on HCL's customer base and the over 5,000 customers these IBM products have.

"This is a new business for HCL and while it is related to their product engineering business it is still a significantly different business model with different sales motions, investment cycles and customer relationship management. As such this is a huge bet by HCL on a new business line," said Peter Bendor-Samuel, CEO at research firm Everest Group.

Phil Fersht, CEO of research firm HfS, said the move sets up HCL for the next few years and gives the firm a huge additional client base to boost its services.

"HCL is a good home for these products - some of the work they’ve (HCL) done with other tools has been impressive... They have the engineer elbow grease to get right into the engine room and rebuild it. But the worry is a lot of these tools have better alternatives in the market with a much clearer product roadmap - so they’ll have their work cut out ramping up quick enough," he said.

In a note to clients on Friday, Edelweiss Research maintained its buy rating on HCL's shares and said they "await further clarity on revenue cannibalisation and amortisation accounting."