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IBM to Sell Software Products to HCL for $1.8B: Key Takeaways


International Business Machines Corporation IBM recently entered into a definitive agreement to divest seven software products to HCL Technologies for approximately $1.8 billion.

Per the terms of the contract, IBM intends to sell Appscan, Bigfix, Commerce, Connections, Notes & Domino, Portal and Commerce software solutions.

The solutions are estimated to have a total addressable market (TAM) exceeding $50 billion. Notably, the software offerings include three on-premise solutions.

The business deal is anticipated to conclude within mid-2019, subject to customary regulatory approvals.

IBM’s shares were up almost 2% yesterday, while that of HCL which trades under NSE (India) with the ticker “HCLTECH” were down approximately 5%.

Notably, shares of IBM have shed 15.5% year to date, compared with the industry’s decline of 10.2%.

Key Takeaways for IBM

The move is in sync with IBM’s increasing focus on bolstering its hybrid cloud business. The company estimates the value of its hybrid cloud business at $19 billion.

In a sharp contrast, IBM’s Cognitive Solutions’ segment is not painting a promising picture. In fact, Cognitive Solutions’ revenues-external decreased 5.7% year over year (down 5% at cc) to $4.15 billion in third-quarter 2018. Segmental revenues pertaining to Strategic Imperatives and Cloud declined 4% and 2%, respectively.

Notably, Solutions Software revenues are reported under Cognitive Solutions’ segment. Solutions Software comprises offerings in strategic verticals like health, domain-specific capabilities like analytics and security, and IBM’s emerging technologies of AI and blockchain. The segment also includes offerings that address horizontal domains like collaboration, commerce and talent. Solutions Software revenues declined 3% year over year in third-quarter 2018.

In a bid to realize hybrid cloud goals, IBM intends to provide enterprises with market leading hybrid cloud platform enabling them to shift their business applications seamlessly to the cloud. In this regard, the company recently entered into a definitive agreement to acquire Red Hat for approximately $34 billion in cash. The buyout is anticipated to close in the latter half of 2019.

By divesting the software products, IBM will gain $1.8 billion, anticipated to improve the company’s cash position, which is crucial at this point of time.

Notably, IBM ended third-quarter 2018 with $14.70 billion in total cash and marketable securities compared with $11.93 billion at the end of second-quarter 2018. Total debt (including global financing) was $46.9 billion, up $1.4 million from the previous quarter.

Moreover, the company is also anticipated to partially mitigate the sluggishness in Cognitive Solutions’ segment with this deal.

In the words of senior vice president of IBM’s Cognitive Solutions and Research, John Kelly, "We believe the time is right to divest these select collaboration, marketing and commerce software assets, which are increasingly delivered as stand-alone products.”

HCL Stands to Benefit

The seven software solutions represent solutions in high-growth security, commerce and marketing domains, which form Noida, India-headquartered HCL’s distinct operating segments. Further, HCL and IBM currently have an IP Partnership encompassing five of the seven products in consideration.

These factors will enable HCL to seamlessly integrate the products in its business processes.

Moreover, some of these solutions are recognized as market leading solutions in respective fields, which is a positive.

Further, with the closure of the deal, HCL is expected to expand its business globally by gaining IBM’s customer base.

Bottom Line

We believe it is a win-win situation for both the companies involved as it enables them to realize their respective business goals.

With the closure, we believe IBM will be well positioned to focus on its hybrid cloud businessin an effective manner. Instead of blocking resources on the development and enhancement of the stand-alone products involved, the company is expected to strengthen its foothold in the hybrid cloud market.

Zacks Rank & Key Picks

IBM carries a Zacks Rank #3 (Hold). Twitter, Inc. TWTR, Upland Software UPLD and Intel INTC are some stocks worth considering in the broader technology sector. All the three stocks flaunt a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Twitter, Upland Software and Intel is currently pegged at 22.1%, 22% and 8.4%, respectively.

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