Post HCL-IBM deal: Domestic IT sector likely to see more IP buyouts

Many intellectual property (IP) buyouts are likely in coming quarters after HCL Technologies (HCL) acquired select IPs from global technology giant IBM in a $1.8- billion deal this month.

IBM has IP partnerships with companies such as Wipro, Tech Mahindra, Persistent Systems, and Aricent Technologies, which is part of the French firm Altran Group post its acquisition last year. 

Analysts are of the opinion that as IBM takes a strategic call to divest its IP portfolio, IT firms with ongoing partnership with IBM are likely to buyout those IPs.

"It's a logical progression. With IBM looking out to sell its IPs, these can go the current vendors or may be sold to other players. With so much of investment done by the current vendors in developing products from these IPs, buyout looks like a feasible option," said Pareekh Jain, founder of consulting firm, Pareekh Consultant.

IBM, which has entered into more than 20 IP partnerships over the past two years with players like HCL, Tech Mahindra and Wipro, has taken a strategic call to streamline its IP portfolio and focus on those products that are relevant for its future roadmap.

Under this initiative, it had sold seven IPs to HCL at a valuation of $1.8 billion this month. Analysts said like HCL, companies having IP partnership with IBM becomes the natural owner of these assets due to the previous product development and support relationship, prompting them to acquire the IP.  "If IBM sells those IPs to other players, then it creates a lot of uncertainty for the current IP partners," Jain of Pareekh Consultant said.

While analysts pointed out that IBM is divesting those IPs that have passed their prime, it would depend on a company's strategy whether to buy them or not. “Just because IBM is not taking money on those IPs doesn't mean that other players can't make money. So, buyout will completely depend on an individual company's strategy," said Siddharth Pai, a former outsourcing advisor and founder of Siana Capital.  

HCL announced this month that it would acquire select IPs from IBM, making it the largest acquisition in the domestic IT services space. The Noida-headquartered firm said it would receive incremental revenues of $650 million annually from 2021 onwards with an operating margins of around 50 per cent from this portfolio.

"Given the valuation of HCL deal, these IPs will be valued at close to three times of their current annual revenue run rate," an analyst from a Mumbai-based brokerage said. 

"While Wipro and Tech Mahindra have adequate reserve to fund these possible acquisitions, it is to be seen whether they will be ready to buy those IPs given the longer gestation period on these investments," the person added.