Dec 18, 2018
Tomás O'Leary
Tomás O'Leary
Tomás O'Leary

On December 6th, 2018, IBM announced that they are selling some of their legacy software products to HCL for a shockingly low price of $1.8B. This deal has most definitely raised some alarms among investors as to whether this deal will pay off.

The selected software products include Appscan, BigFix, Unica, Commerce, Portal, Lotus Notes & Domino and Connections and have a total addressable market value of more than $50B. So why sell them for 4% of their market value? Even worse, IBM paid approximately $6.7B acquiring these software products, why sell them for 73% less than what they paid for them? What is IBM doing or not doing to these acquisitions for them to lose such an enormous value.

This could potentially enable a fresh start for HCL as IBM hasn’t been paying attention to these software products for years. The decline in value could be just down to neglect, with the right nurture approach, HCL may well be laughing all the way to the bank.

Leaving the deal size aside, with this sale is IBM saying goodbye to legacy? To no avail, IBM have been striving to become the leader in the Hybrid Cloud Market for quite some time. Is this sale an attempt for IBM to slim down their legacy business so they can completely focus on cloud computing? This market domination won’t be cheap and are IBM in need of some extra cash to achieve this, especially after their colossal acquisition of Red Hat for $34B? Have they bet the house on cloud?

Over the last six years IBM have experienced twenty-two consecutive quarters of declining revenue out of twenty-four. Its market capitalization has dropped to $112 billion from a peak of $240 billion in 2014. In order to counteract this decline, IBM have been acquiring more and more companies to gain back their industry performance. Unfortunately for them, this has yet to pay off as their stock price under performs again this year, declining by 18%.

With the Red Hat acquisition in October, IBM are making it evident now that they are finished with former software like Lotus Notes and Domino and are betting on embracing private and hybrid cloud deployments. Possibly IBM have gone too big once again and this time they will have to give up Red Hat in order to save themselves and start focusing on smaller strategic acquisitions that they can afford to nurture and actually manage properly.

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