Is CSC Acquiring HCL Tech?

How can two IT services companies join hands to deliver services that in fact make them sworn competitors? This is the question that perturbed us when Anant Gupta, CEO of HCL Technologies and Mike Lawrie, CEO of CSC came together in front of the media on January 15 in New Delhi. They announced a strategic partnership to address applications modernization market. Is application modernization the reason for their partnership?

Well, the companies quoted figures from Gartner to justify their partnership. According to Gartner's 2014 Market Forecast for IT Services, the addressable market for applications services is $210 bn in 2014. Perhaps no one can question Gartner estimates which are more or less in line with the market opportunity in this space. However, the question arises on the partnership which both the companies have entered in. At the first glace, the partnership is like two foes have agreed to share the bed. Any industry peer would see it as fishy. If the opportunity is so big, it was easier for both the firms to expand their capability and use existing resources to tap it. Both have a strong customer-base in the US market and specifically in the financial sector which is expected to put a lot of their resources to modernize their infrastructure and transition to the cloud.

Can competitors be partners?

Why this partnership? Both honchos argued to justify the partnership. "The partnership is to reap the opportunities together and build joint capabilities in order to go about the application modernization market, where customers are keen to modernize their existing infrastructure and be cloud-ready," says Anant Gupta, CEO, HCL Technologies. He continued to insist on his statement with different facts. He was very well supported by Lawrie. But the odd in Lawrie's statement was palpable. "The partnership is about the untapped opportunities in the application modernization space, financial sector and cloud-enablement," Lawrie adds. But these are the three areas where these companies compete. Banking is a big sector which constitutes a major chunk of their revenues.

Later, Lawrie adds that the companies will jointly hire staff to execute this partnership and build two centers of excellence in Chennai and Bangalore. Now, the question was who would head the partnership part. "There is no specific head for this. It would be jointly handled by the staff in two companies," says Lawrie.

No doubt, the size of the deal is much bigger than visible. If it was not so big, why would Lawrie fly all the way to New Delhi to sign it? What is being shown looks different from what can actually be behind the scenes. Instead of forming a separate division, they are keeping this an open deal to be jointly handled, executed and managed. It is not an easy to digest fact, since it might result into a clash of business values because of their own capabilities and existing customer base. They did not reveal a convincing model of revenue or profit sharing. "The revenues would be shared as per the resources used by the companies," reveals Gupta.

Is CSC buying HCL Technologies or vice-a-versa?

What is the essence of the partnership? On the surface it looks like a planned beginning for the merger of the two companies. So the question is who's buying whom? HCL Technologies is a $4.5 billion company and has fast emerged on the scene since its IPO in 1999, whereas CSC is a $13.5 billion company and is looking at increasing its reach in the market after a rough phase in the last few years. While HCL Technologies does not look in a position to buy CSC despite its ever-growing profitability and customer-base, CSC is very keen to acquire businesses. "CSC has acquired companies to enhance its capability in cloud and other emerging areas. The recent acquisition of ServiceMesh is the result of our commitment to expand our capability. We are looking at acquisitions that help us to strengthen our market leadership," reveals Lawrie. Lawrie's answer with regard to further acquisition feeds in the thought that CSC may have started the process to acquire HCL Technologies through this partnership. However, it is too immature to say. But indications are towards the possible future merger of both the companies. While this is not a conclusion, it indicates at the shift in the market. Secondly, in last few years the industry has seen Shiv Nadar venturing into areas such as education. So it is probable that HCL Group is planning to sell its IT services business.

However, only time will reveal the truth behind this partnership. Till then it would be interesting to see how this pans out and what both companies do.

Facts from the press statement: According to the terms of the agreement, both companies intend to share equally all cloud application modernization revenue and direct costs. With a new governance board providing oversight, the partners will share dedicated employees and technologies, as well as production and development work. As part of the partnership, HCL will white label CSC's BizCloud, industry leading, highly secure and highly flexible private cloud offering for the enterprise. HCL and CSC will benefit from the increased scale of this offering, expanded coverage in new markets and incremental revenue opportunities.