HCL-CSC alliance signals potential merger

The partnership between the Indian and US companies may seem to be a straightforward bid for greater market access, but some think there's more to it than that on the horizon.

There's quite a bit of head scratching going on in India following last week's news that India's fourth-largest IT services player HCL has struck up an " alliance " with Virginia-based Computer Sciences Corp.

The two companies declared the union to be confined to application modernization, a new business area. On the surface of it, the advantages to both entities are quite clear. CSC's offshore capabilities for higher-margin businesses are apparently limited (although it does have a whopping 24,000 people across seven locations in India already through its earlier acquisition of Convansys in 2007).

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Now, the partnership will leverage HCL's offshore strengths — especially in infrastructure management services. For HCL, infrastructure is now a $1 billion plus business, and has been its fastest-growing vertical, largely built from scratch by its new-ish CEO Anant Gupta. The union will also rely on CSC's cloud capabilities, something that HCL is weak in, to land new US customers — especially those in banking and financial services verticals, which are also HCL's weaker areas.

However, in a somewhat bizarre development, the firms also declared that they will go head-to-head for other parts of a client's business. As this piece in Mint points out, it's rather rare for competitors to get into partnerships, and it's not very clear to what extent the partnership will scale up.

How have these kinds of deals worked in the past? As the Mint piece points out, Electronic Data Systems (EDS) also announced with much fanfare a partnership with Cognizant Technology Solutions for its global delivery model. But results were not up to par a year later, and EDS ended up simply going out and acquiring another competitor, MphasiS.

Some industry observers such as Sundar Vishwanathan, engagement manager at Zinnov Management Consulting, aren't convinced by the alliance. After all, CSC could have easily leveraged its own India presence, while HCL doesn't really have any special abilities in application modernization, he adds. What this is, says Vishwanathan, is simply a lead-up to an acquisition of HCL by CSC.

Information technology analyst Shashi Bhusan of Prabhudas Lilladher seems to agree.

"We believe that the success of this partnership could possibly result in one integrated company," he said, according to the Business Standard. The managements of the companies apparently refused to comment on talks of a merger.