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Why did HCL buy $1.8B worth of legacy products from IBM?

Why did HCL buy $1.8B worth of legacy products from IBM?

Several of the offerings represent large and growing market opportunities

C Vijayakumar (CEO - HCL Technologies)

C Vijayakumar (CEO - HCL Technologies)

Credit: HCL Technologies

As the ink dries on the largest acquisition made by HCL Technologies, the service provider must now move to monetise a portfolio housing seven legacy IBM products.

The acquisition, expected to be finalised in mid-2019, totals US$1.8 billion and lands HCL in the middle of a highly competitive software market, with the business expecting an incremental US$650 million in annual revenue from the second year after the close of the deal.

Leveraging an ongoing IP partnership for five of the seven products, several of the offerings represent large and growing market areas such as security, marketing, and e-commerce.

But according to industry analysts, the best-known ones, such as Notes and Domino, are legacy products. 

“The acquisition puts HCL squarely in the software space and offers some differentiation,” observed Hansa Iyengar, research analyst at Ovum.

Specifically, the products HCL acquired include AppScan for web application security testing; BigFix for endpoint management and security and Unica (on-premises) for marketing automation.

Furthermore, other acquired offerings include Commerce (on-premises) for omni-channel e-commerce; Portal (on-premises) for digital experience; Notes and Domino for email and low-code rapid application development; and Connections for workstream collaboration.

“HCL's plan is to revive these products - which already have an established client base - offer upgrades, and cloud-enable them where possible,” Iyengar said.

Prior to the transaction, the technology provider already had an ongoing IP partnership with IBM for five of these products, spanning Notes/Domino, Unica, AppScan, Portal, and BigFix.

In other words, and as explained by Iyengar, HCL had taken over responsibility for the development and maintenance of these products while IBM white-labeled them.

“By acquiring these products, HCL will be able to transition clients and partners onto its letterhead,” Iyengar added. “However, while Notes and Domino have a long-established client base, it is also a client base in long-term decline.

“With this move, HCL hopes to build a large software business of its own, and will be able to leverage the existing customers, partners, sales channels, and service organisations that it will inherit as part of the deal.

“HCL now has the ability to integrate these tools into its services business, which will further strengthen its proposition in areas such as security, e-commerce, and collaboration.”

According to Iyengar, application testing and modernisation represent “important businesses” for HCL, with this newly acquired IP allowing the provider to “industrialise” more of its application modernisation and cloud-enablement processes.

Software strategy

In assessing the make-up of the agreement, Iyengar said that the buyout also puts HCL into the software space, a space in which competition will differ from traditional markets.

No longer will direct competition come from the services players, outlined Iyengar, but from other software companies.

“However, HCL still has one challenge,” cautioned Iyengar.

”Although these products have solid technology and an established customer base that has made significant investments in them over many years and would be happy to see them get a new lease of life, they are ageing, and face competition from newer products in the market.

“For those customers that are already moving from these IBM products to newer ones, HCL can also develop a transition program to keep those customers and grow its own customer base further.”

However, Iyengar said HCL will need to address issues such as “lack of user friendliness” that plague these products and the “dearth of talent” to continue supporting them.

“It will need to articulate a coherent strategy for reviving these products and, more importantly, take that message to customers, and lay out a clear plan for integrating these products into its wider portfolio,” Iyengar advised.

“It will also need to provide evidence that it is doing what it takes to position these products (many of them well over 15 years old) against newer products from competition.

“HCL's challenge will be in evaluating each product and quickly identifying those customers that want to remain on these software platforms and those that are ready to make a move, and retaining them as customers on new platforms.”

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