Hitachi’s Logic of Acquiring GlobalLogic for $9.6 Billion

Today there is news of Hitachi’s $9.6 Billion acquisition of GlobalLogic. If it goes thru, this will be the biggest acquisition ever in the engineering services space and the biggest acquisition by any Japanese IT services firm. The last biggest engineering acquisition was of Capgemini – Altran and the Japanese IT service acquisition was of NTTDATA -Dell IT Service.

 Why is the software product engineering market hot?

Software product engineering was a niche market till a few years back, addressing the product development needs of ISVs. Large IT firms ignored this market as there was an internal conflict in applications vs. software products, and it led to the rise of pure plays in software product engineering with the likes of EPAM, Globant, GlobalLogic, Persistent, among others.

 A few years back, when enterprise digital transformation started taking shape, the software product engineering market moved from niche to mainstream. The backbone of all enterprise digital transformation is software product engineering be it platform development, cloud development, data engineering, among others.

 All big IT firms have developed their strategy to capture this market either through internal capabilities or thru acquisitions. The pure-play software product engineering firms found themselves at the right place at the right time. Their revenue grew fast even in pandemic and valuation even faster than revenue.

 Why high valuation in software product engineering?

 With a $9.6 Billion valuation, it looks like 11-12X of sales for GlobalLogic. This is in line with some valuation of other pure-play software product firms as EPAM. Even Happiest Mind valuation is in a similar range.

 Why is Hitachi buying GlobalLogic?

 Japan is an underpenetrated market for engineering services. With GlobalLogic acquisition Hitachi will become a full-stack engineering services leader in Japan, giving it a great headroom for growth.

Hitachi recently consolidated its IT and engineering services in a couple of units with a total of $2.1 Billion in revenue in 2019. It also augmented its IT and engineering service leadership team with leaders from other firms including Cognizant.

See EIIRTrend World’s Top 100 service provider ranking in 2019 based on revenue (Research Link)

Japanese companies have been buying companies and trying to grow global. Hitachi is one of the smallest of the top five Japanese IT service providers. GlobalLogic gives it an engine for growth, good US, Europe customer presence, and India Europe delivery presence.

Impact

• More focus on the Japanese engineering and IT market. Japan is an under-penetrated market for Global and Indian IT service providers. Hitachi becomes a full-stack engineering player in the Japanese market. Other IT and engineering service providers will accelerate their Japanese strategy. (Read JFK)
• Global MNCs such as Capgemini, Accenture, DXC have been entering the engineering service space with acquisitions. More Global firms will firm up their engineering play with acquisitions. (Read Link).
• With a $9.6 billion valuation in the spotlight, the valuation of many other software product engineering companies will also be positively impacted
• More companies and PE firms might look for acquisition or investment in software product engineering companies. Even pure-play engineering service providers who don’t have a large footprint in software product engineering will look at this more seriously.
• Big IT firms will take software product engineering seriously. More investment, calling out revenue separately (like product and platform revenue), and even think of listing their software product engineering business separately in the long term
• Inspire a generation of new entrepreneurs in the software product engineering space. This is a proof point that this sector can command high valuation similar to software products or B2B SaaS firms.

Bottom-line: For a change, the spotlight on Japan and software product engineering is good for all in the ecosystem.