IBM is getting out of the legacy software game and for no small sum, selling it in a $1.8 billion deal to HCL, the Indian technology services company.
The deal, which was inked in the early part of December marks the biggest acquisition ever by an Indian IT services company and is aimed at expanding HCL’s customer base. Prior to the deal, HCL had an intellectual property partnership with IBM and now owns Lotus Notes, Appscan, and Domino. The market size for these products, according to one report is around $50 billion.
In prepared remarks when the deal was announced HCL said it expects the software to give it 5,000 clients and around $650 million in incremental revenue beginning in the middle of next year. "The products ... are in large, growing market areas like security, marketing, and commerce, which are strategic segments for HCL," said C. Vijayakumar, president and CEO of HCL Technologies at the time.
The deal didn’t sit well with HCL investors which questioned the nearly $2 billion investment in legacy software. After all even IBM doesn’t think it’s valuable enough to hold on to as it expands its cloud and blockchain offerings. Still, the fact that HCL is willing to pay a high price for legacy software implies it believes there is a big market there. "The large-scale deployments of these products provide us with a great opportunity to reach and serve thousands of global enterprises across a wide range of industries and [geographic] markets," Vijayakumar went on to say in the press announcement.
For IBM the sale of its legacy software business underscores its focus on the cloud where it wants to be the leader. By unloading the legacy software business it frees the company up to focus more energy on its cloud aspirations. When announcing the deal John Kelly, IBM senior vice president, Cognitive Solutions and Research summed it up like this: "We believe the time is right to divest these select collaboration, marketing, and commerce software assets, which are increasingly delivered as stand-alone products.” The executive noted that over the past four years IBM has been focusing investments on AI, hybrid cloud, cybersecurity, analytics, supply chain, and blockchain.
The asset sale also comes just a few weeks after its $34 billion acquisition of RedHat, aimed at transforming the cloud market. That transaction isn’t sitting well with IBM investors who worry about the debt needed to bankroll the all-cash acquisition of RedHat. It has faced credit rating downgrades and ended 2018 with its stock down double digits.