Advertisment

The Call To Excel

author-image
DQI Bureau
New Update

After a long time, talks of mergers and acquisitions are once again in the

air. This time, the talks were between two companies co-founded by Shiv Nadar–HCL

Infosystems (HCLI) and HCL Technologies (HCLT). Unlike the previous examples in

the Indian IT sector of complete acquisitions like CMC by the Tata group or

Deutsche Software India by HCLT, here HCLI hived off its division to HCLT.

Advertisment

Who gets what?



As per the restructuring and realignment, the software export business of

HCLI will be hived off to HCLT. The division with revenues of Rs 170 crore as on

year ending June 2002 has a resource base of over 800 people with a majority

functioning as technical professionals and in the development centers in Kolkata,

Chennai, and Noida. In revenue terms, of the Rs 170 crore, about 42% came from

domestic operations while the balance was the overseas component.

Moreover,

as part of the restructuring, HCLI is hiving off its 128-seat facility for the

technical help desk business, currently under HCL Infinet, for a sum not

exceeding Rs 2 crore. This 168-people division generated a business of Rs 2.7

crore with a profit before tax of Rs 8 lakh. The current client base of the

technical help desk includes several US organizations including a large telecom

and several software product companies.

So what does HCL Infosystems get in return? HCLI shareholders will get two

additional shares of HCLT for every nine shares held. To facilitate the same,

HCLT would issue 7.09 mn equity shares to the shareholders of HCLI and the

valuation is based on an independent valuation exercise carried out by

PriceWaterhouseCoopers and Bansi Mehta & Company.

Advertisment

Gains and losses



In FY00-01, HCLI focused on the services market with a significant thrust on

the exports market (specially the Asian Pacific Rim market). Subsequently export

revenues had jumped from 4.7% to 12% (Rs 153 crore). The services thrust

continued in the subsequent year but exports failed to bring in the desired

results. In FY 01-02, while exports remained stagnant at 12%(Rs 147 crore) of

total revenues, it dropped by a couple of crores compared to the previous year.

Blame it on the slowdown, but the bigger problem for HCL Infosystems was the

lack of an important enough brand name in the global market with significant

wins.

"The

merged entity will be better equipped to address a wider spectrum of

customer requirements, and to tap opportunities in emerging service

lines"

Shiv

Nadar,
chairman,

president & CEO, HCL Group

According to analysts, most of the high technology, high margin business even

today rests in the US, a market where HCLI did not have much presence. This was

becoming a problem for HCLI, as it could not scale to the likes of HCLT, Infosys,

or Wipro. According to sources in HCLI, the management felt that being at the

bottom end of the software player numbers game would become a major obstacle for

future growth in this segment. Comments Ajai Chowdhry, chairman and CEO, HCLI,

"Today for any Indian software company to compete globally, it has to have

a certain scalability. We have realized that for this unit to achieve

its potential, it is best to give it the operational scalability of a

company like HCL Technologies."

Advertisment

Why HCLT? The answer is very simple–customers. Given the fact that both the

companies do share a common culture, it was decided that HCLT would best take

care of the existing customers and even the customers would find it easier to

transition to the sister company.

"For

any Indian software company to compete globally today, the real imperative

is that it have a certain scalability"

Ajai

Chowdhry,
chairman

and CEO, HCL Infosystems

And of course, the company management felt that its own shareholders could

participate in the software industry and hence did not go in for a cash

transaction for the division.

Advertisment

On the other hand, the merger would help HCLT consolidate its practices in

the area of end-user applications and further widen its service portfolio. Also

it gives HCLT an entry into the Asia Pacific market, which is slated to be one

of the fastest growing markets in the coming years.

Comments Shiv Nadar, chairman, president and CEO, "The merged entity

will be much better equipped to address a wider spectrum of customer

requirements as well as capture opportunities in emerging service lines."

Also the technical help desk would complement HCLT’s own ITeS subsidiary HCL

eServe which offers services in the technical help desk, BPO, and customer

contact centers.

The

road ahead



With the merger, HCLI has shed off its export thrust and will now focus only

on the domestic markets. Along with the de-merger, HCLI has also restructured

itself into two key areas. It will transfer its office automation division to

its 100% subsidiary HCL InfiNet and this division will focus on communication,

imaging and of course continue to be in the ISP business, while HCLI will

concentrate on the IT products, solutions and related services business. And if

there is any demand from the software side viz package implementation or

software development, HCLI could always bank on the sister company to bail her

out.

Yograj Varma

Advertisment