The transaction will help HCL Technologies, which will get about 74% of Geometric’s total business, increase its business in the engineering services space. Photo: Ramesh Pathania/MintThe transaction will help HCL Technologies, which will get about 74% of Geometric’s total business, increase its business in the engineering services space. Photo: Ramesh Pathania/Mint

Bengaluru: HCL Technologies Ltd on Friday agreed to buy all of the business done by Mumbai-based software firm Geometric Ltd, except a joint venture the latter has with Dassault Systèmes SA, in a share-swap deal valued at $190 million.

The transaction will help HCL, the country’s fourth largest information technology (IT) firm, increase its business in the engineering services space.

On Friday, the board of Geometric accepted Noida-based HCL Technologies’ offer of a share-swap under which its shareholders will get 10 HCL shares for every 43 shares they hold in Geometric.

HCL will issue a total of 15.64 million shares. Since HCL’s shares ended the day at Rs.820.70 on BSE, this means HCL has valued the firm’s business at Rs.1,284 crore.

HCL will get about 74% of Geometric’s total business and expects the transaction to be completed by October-December.

Geometric, on its part, will merge into 3DPLM Software Solutions Ltd (3DPLM), its joint venture with Dassault Systèmes, thereby giving 100% ownership to the French company.

Every shareholder of Geometric will receive one listed redeemable preference share of Rs.68, carrying a dividend of 7% per annum, in 3DPLM.

“HCL Technologies today announced an agreement to acquire (through demerger) all of the business of Geometric Ltd, except for the 58% stake that Geometric owns in the joint venture—3DPLM Software Solutions Ltd—with Dassault Systèmes,” the company said in a statement.

HCL Technologies says this acquisition—the largest buyout since it spent $658 million to buy Axon Group, a UK-based enterprise application consultancy firm, in 2008—will help it scale up its offerings and win large deals from engineering companies.

For promoters of Geometric, this marks the end of a three-decade journey, after Godrej set up Geometric in 1984 and incorporated it as an independent firm in 1994.

Upon completion of this merger, HCL Technologies will generate $1.34 billion from engineering services and become the world’s third largest technology engineering outsourcing company.

Currently, HCL Technologies gets about $1.16 billion or 19% of its $5.95 billion revenue from offering solutions to engineering firms, and ranks fourth, behind two French giants, Altran Technologies SA and Alten SA, and Austrian automotive consulting firm, Anstalt für Verbrennungskraftmaschinen List (AVL). Privately-held AVL is estimated to generate $1.25 billion from engineering services, according to HfS Research, the US-based IT outsourcing research firm.

“HCL, with the acquisition of Geometric, will move to No. 3 in global rankings,” said Pareekh Jain, research director of engineering services at HfS Research. Jain said engineering services had recorded the highest growth for homegrown technology firms in the last two years, and HCL can help scale up Geometric’s business.

Geometric has not recorded any growth in revenue over the last two years despite the product engineering space growing at a healthy pace, and for this reason most equity analysts questioned the rationale of the deal.

“The management should tell what synergies it sees in this kind of deal,” said a Mumbai-based head of research at a domestic brokerage, on condition of anonymity.

“Are you buying for Geometric’s clients or for getting talent? HCL itself has some marque clients and paying this amount for getting some more client names just does not make sense. They are not getting the business from Dassault. On the skill sets, I don’t think Geometric was the best firm to buy.”

Essentially, engineering services for technology outsourcing sector means business generated from offering software support or improving assembly line processes for large manufacturing and engineering companies like American aircraft manufacturer Boeing or French giant Dassault.

The largest homegrown technology firms like Tata Consultancy Services Ltd, Infosys Ltd and HCL have business units in which a thousands of engineers work on projects on behalf of clients.

Geometric generates all of its business from work on specific research and development programmes outsourced by its clients in the engineering space.

“As engineering services is transforming from niche to mainstream, there will be consolidation in the sector. Geometric has good talent and good capabilities but was struggling with sales. Under HCL umbrella, I expect Geometric has the capability to grow at a higher rate,” said Jain of HfS Research.