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MarketScreener Homepage  >  Equities  >  Nyse  >  International Business Machines Corporation    IBM

INTERNATIONAL BUSINESS MACHINES CORPORAT

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

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12/07/2018 | 06:22am EST
The logo for IBM is displayed on a screen on the floor of the NYSE in New York

MUMBAI/BENGALURU (Reuters) - HCL Technologies will buy some software assets from U.S.-based IBM Corp for $1.8 billion (1.41 billion pounds), 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 and Infosys 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.

HCL recorded revenue of 505.69 billion rupees (5.60 billion pounds) 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)

By Sankalp Phartiyal and Krishna V Kurup

Stocks mentioned in the article
ChangeLast1st jan.
HCL TECHNOLOGIES 1.21% 1066.15 End-of-day quote.10.56%
INFOSYS LTD 0.20% 734.95 End-of-day quote.11.53%
INTERNATIONAL BUSINESS MACHINES CORPORATION 1.02% 139.25 Delayed Quote.22.50%
TATA CONSULTANCY SERVICES 0.60% 1925.65 End-of-day quote.1.72%
WIPRO 1.12% 378.75 End-of-day quote.14.48%
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Financials ($)
Sales 2019 78 049 M
EBIT 2019 14 066 M
Net income 2019 10 777 M
Debt 2019 33 418 M
Yield 2019 4,70%
P/E ratio 2019 11,40
P/E ratio 2020 10,97
EV / Sales 2019 2,05x
EV / Sales 2020 2,00x
Capitalization 127 B
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Mean consensus HOLD
Number of Analysts 21
Average target price 141 $
Spread / Average Target 1,1%
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Managers
NameTitle
Virginia M. Rometty Chairman, President & Chief Executive Officer
James J. Kavanaugh Chief Financial Officer & Senior Vice President
John E. Kelly Senior VP-Cognitive Solutions & Research
Martin Jetter SVP-Global Technology Services
Sidney Taurel Independent Director
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INFOSYS LTD11.53%44 996