IBM’s saleOpens a new window of Lotus software tools to India’s HCL clearly demonstrates that both companies are now focused on core strategy. IBM originally acquired Lotus in the 90s, but is now designing its future as an enterprise hybrid cloud provider, authenticating its presence in the field with the $34 billion acquisition of Red Hat in October.
Off-loading business email and applications services Notes and Domino also streamlines IBM’s focus to cloud services, while HCL concentrates on strategically boosting its presence in enterprise applications by embedding the company’s services more within corporate IT departments worldwide.
The move also marks a closing chapter in the story of Lotus, a one-time innovator in US business software and a pioneer of enterprise management tools long before the emergence of Salesforce, Slack and Zendesk.
HCL Flashes the Cash
In the biggest-ever tech purchase by an Indian company, HCL is paying $1.8 billion, nearly one-fifth of its annual revenue, to acquire a range of tools from IBM. These include the former Lotus Notes product and its Domino off-shoot and workstream collaboration tool Connections, which were rebranded as IBM products.
IBM Notes is the client that sits on the user’s computer while Domino is the corporate server. Together, they offer enterprises a client-and-server set-up to deploy email, calendars, contact management and a range of business applications.
Also included in the deal are on-premise tools Unica for marketing automation, Portal for digital experience and e-commerce tool Commerce, as well as appscan for secure app development and BigFix for secure device management.
The deal follows an agreement last year in which IBM assigned the development role for Notes and Domino to HCL. This time, HCL is buying the intellectual property ownership of the products. HCL says this plays to its strategy of expanding ownership of products and platforms that offer higher margins than its infrastructure, development and maintenance businesses.
In reaction to the news of the deal, HCL’s share price fellOpens a new window . Investors expressed concern that it will be hard to monetize the products for which it is paying such a high price. HCL is acquiring some 5,000 customers along with the software and believes it will be able to upsell other services and products to them, as IBM has done before, although fears persist that the products have been marketed by IBM as part of wider outsourcing and managed services deals struck by Big Blue.
The Price of Loyalty
The reservations are a testament to IBM’s strong customer relationships, won through its powerful brand name, trusted services and smart financing options. To hang on to the 5,000 customers of these products and sell them more services, HCL will have to match IBM’s offer.
HCL could find it challenging to meet the goal of $650 million in added revenue from the products – ambitious, but enabling the deal to pay for itself in just three years. This year, IBM unveiled a beta version of Lotus and Domino 10, showing that there is still life in the products, as well as scope for further expansion.
The deal draws to a close IBM’s long association with Lotus, which was founded by Mitch Kapor and Jonathan Sacks in 1982. The business achieved huge success with its Lotus 1-2-3 spreadsheet program and bundled a variety of its software products in Lotus SmartSuite in the 90s. The Lotus Notes and Domino client/server product that offered email and other applications became a staple for enterprises, and many companies came to rely on them.
In 1995, IBM bought Lotus outright for $3.5 billion, nearly $6 billion in today’s valuation, mainly to acquire Lotus Notes and build its position in the client/server market. IBM rebranded Lotus products, but they were to be eclipsed by Microsoft Outlook and its Exchange server, and in the longer run by the move to web-based services and the rise of the cloud.
In the interim, though, many companies have continued to rely on Notes and Domino for email and other software services. And in many parts of the world where cloud still has limited penetration, Notes and Domino remain a major element of corporate IT systems. This opens substantial possibilities for HCL to make further inroads in developing markets. HCL also says it’s planning to create software-as-a-service versions of Notes.
Lotus Notes was the forerunner to the enterprise cloud services of today and had a formative effect on many of today’s IT directors. HCL’s challenge is to breathe new life into the product in a very different world.