My Evaluation of Hitachi’s Acquisition of Global Logic

My Evaluation of Hitachi’s Acquisition of Global Logic

This week, we saw a marquee M&A deal announcement after Hitachi has stated that it will acquire US-based digital engineering services company GlobalLogic for $9.6 billion under global expansion plans for its IoT digital services business Lumada. This acquisition marks the biggest deal in the engineering services space and Hitachi’s intent to quickly overhauling its group businesses to focus on the IT sector while shedding non-core operation. In this post, i provide my evaluation of Hitachi’s acquisition of Global Logic and how this deal could impact the ER&D landscape. 

Restructuring of Hitachi Group

Hitachi recently had restructured its business operations to focus on the software services business. The firm invested 1 trillion yen growth investments in the IT sector, mainly through Hitachi Vantara, to strengthen digital resources, including digital products and solutions partnerships, service, and delivery resources. 

The acquisition has arrived at the correct time for Hitachi after its Hitachi Vantara division experienced layoffs and executive churn in 2020. During this time, Hitachi Vantara CEO Gajen Kandiah promised to pivot the group toward five emerging business and technology opportunities:

  1. Solutions to Optimize Data Center Efficiency, which tilts heavily on the Hitachi Virtual Storage Platform 5000 Series
  2. Solutions to Maximize Data Center Flexibility, which draws the company’s updated Unified Compute Platform (UCP)
  3. Solutions to Accelerate to the Cloud, which leveraged REAN Cloud acquisition and Kubernetes service offerings
  4. Solutions to Modernize Data and Applications through Lumada DataOps and Smart Spaces offerings
  5. Solutions for OT/IT Convergence, which draws the Lumada IoT platform

About Global Logic

GlobalLogic, founded in 2000, was a provider of outsourced software and product development services. Backed by venture funding, GlobalLogic then acquired Lambent Technologies — an offshore software development firm based in India. From 2006 through 2018, GlobalLogic had many investors and private equity ownership changes, including Apax Partners, which sold its stake in GlobalLogic to private equity firm Partners Group in 2018. Under Partners Group, GlobalLogic made multiple growth-oriented moves from 2018 through Q1 of 2021. 

Currently, GlobalLogic develops platforms for companies pursuing digital business opportunities and has strong capabilities in the “chip-to-cloud” in automobiles, health care, and industry. GlobalLogic operates design studios and software product engineering centers in 14 countries, with revenues of ~$1.2 billion and EBITDA margins adjusted to over 20% in the fiscal year 2021. GlobalLogic has projected that its adjusted EBITDA would exceed more than $ 1 billion (approximately 108.0 billion yen) by FY 2028.GlobalLogic’s customers include Sprint and automaker Volvo, and this acquisition will give Hitachi access to these blue-chip logos. GlobalLogic has more than 20,000 employees in 14 countries, along with a delivery center in India. 

Deal Structure

Hitachi will acquire GlobalLogic Worldwide Holdings through a merger involving MergeCo H Global Inc. (SPC), a subsidiary established by Hitachi Digital Holdings for the transaction using the reverse triangular fusion method. In this method, Hitachi Digital Holdings will make a cash offer to GlobalLogic Worldwide Holdings shareholders and, subsequently, will cancel all outstanding shares of GlobalLogic Worldwide Holdings. All SPC shares held by Hitachi Digital Holdings will get converted into common shares of GlobalLogic Worldwide Holdings, the incorporating company. The closing of the transaction would consummate by July 2021 and subject to customary conditions and regulatory approvals.

Transaction Valuation

The acquisition price values Global Logic’s shares at $8.5 billion, more than three times what they were worth in 2018, with $1.1 billion allocated to repaying off its debt. Canada Pension Plan Investment Board and Partners Group, the two largest shareholders in GlobalLogic, have cashed out with $3.8 billion from the sale. 

GlobalLogic will be an integral part and engine of growth for Hitachi’s digital solutions and services portfolio from Lumada. Post-acquisition, Global Logic will operate as a wholly-owned subsidiary of Hitachi. The combined entity would have an equity value of $8.5 billion (approx. 918 billion yen), approximately 37.4x in CY2021, and 29.4x in CY2022 of expected adjusted EBITDA. This valuation is within the calculation range of Hitachi’s comparable analysis and discounted cash flow method. The total acquisition cost, including the amortization of GlobalLogic’s interest-bearing debt, would be ~$ 9.6 billion.

In my view, this premium paid by Hitachi relies heavily on the organic growth potential of Global Logic and the expected synergies with Hitachi’s IoT businesses. After this acquisition, Hitachi’s IT-related sales would be 25% of its annual revenues. They would reach 1.97 trillion yen in the year ended March 2021, while IT’s operating income would exceed 232 billion yen, ~50% of the group’s operating income, and 10% operating margin. Currently, Hitachi’s IT revenues come from domestic clients, with 70% of IT revenues from BFSI and government agencies. While 50% of group revenues come from overseas, these revenues primarily come from elevators and railways. 

Effect of this Acquisition on Industry

The transaction has affirmed that software is becoming pivotal to the strategy of non-tech companies. Companies that harness software successfully can earn extensive increases in productivity, leading them to solid competitive positions. Firms have recognized the shift in value creation sources toward software and have realized that they need to compete in software to win market share and gain revenues. Thus, we are seeing companies using M&A as a tool to position themselves as software providers as their core competence to take advantage of the market demand.

Companies with distinctive know-how in software and with a competitive advantage can scale with digital platforms, enabling them to seize a disproportionate return on investment. In my view, Hitachi realizes that in today’s data-driven world, coupled with machine learning algorithms, firms can feedback on the data about customers, products, or operations to its run-time systems. 

However, making this shift isn’t easy as firms need to have the ability to envision a software-driven future. This shift necessitates both vertical industry and domain competence, as well as advanced software development capabilities. Hitachi recognizes that they do not possess the capabilities needed to reinvent themselves and must identify the right tech partners to assist customers on their digital journeys as they develop software core competence. 

Final Thoughts

In my view, Global Logic plugs the gap for Hitachi in Software development capabilities as Global Logic is strong at building software products. With this acquisition, Hitachi follows GE, Siemens’s footsteps in becoming a premier digital industrial company and software company. It’s a far cry from Hitachi; we know that manufactures home air conditioners and VCRs by Hitachi. We are driving towards a software-driven world.

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