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India's HCL Sees Shares Slide After Agreeing to Buy $1.8B Worth of IBM's Software Assets

Indian software maker HCL has agreed to buy some of IBM's software assets for $1.8 billion • Its shares declined on the news, making it the worst performer among India's 50 to companies • Investors are worried about the assets' revenue-generating potential • HCL CEO defended the decision, saying the deal instantly brings 5,000 new customers

Ameya Karve and Jeran Wittenstein (Bloomberg) -- HCL Technologies Ltd., founded by Indian billionaire Shiv Nadar’s family, was the worst performer among the nation’s top 50 companies after the software maker said it was buying some of International Business Machines Corp.’s software assets for $1.8 billion.

The shares slid 5 percent to 961.95 rupees at the close in Mumbai on a day when the S&P BSE Sensex was the biggest gainer among Asian benchmark equity gauges. The decline was the steepest in seven weeks.

HCL is buying seven products, including Connections that enables streaming from social networks, document authorization, reporting expenses and reviewing emails. The planned purchase -- the biggest by an Indian software maker -- has had some investors questioning the price tag in relation to the assets’ return potential.

“The market is grappling with the question of whether HCL has bitten too much, too early with this deal,” said Girish Pai, head of equity research at Mumbai-based Nirmal Bang Equities Pvt. “This is a bet the company is taking as a new source of growth, but this revenue stream isn’t going to deliver you great return ratios.”

HCL will borrow $300 million to fund the deal, while the remainder will come through its profits. The transaction is expected to close by mid-2019, according to a statement.

“The market is divided on whether it is a good thing to get into an intellectual property business, which has inherent risks and volatility,” Neerav Dalal, an analyst at Kim Eng Securities Pvt. in Mumbai said. “Post this deal, the IP business will contribute roughly 20 percent to HCL’s revenue from the current 12 percent.”

Customer Acquisition

The deal will help HCL acquire 5,000 customers, a task that would have otherwise taken two decades, HCL Chief Executive Officer C. Vijayakumar said on a conference call with investors. An existing licensing pact between the two companies will continue for five of the products.

“It’s a mix of products, some of them are cash cows and some of them will keep growing,” Vijayakumar said. “Some of the products will need some infusion of fresh life to allow them to grow faster.”

The asset-sale comes as IBM is seeking to become a leader in the hybrid cloud market, which combines software and services delivered over the public Internet with similar offerings run on companies’ own servers and data centers. In October, the Armonk, New York-based company agreed to buy Red Hat Inc., a specialist in this area, for $33 billion.

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