By Kritika Venkat, Akhil, Siddharth T (NYU), Alexis Bernet, Martín Palomar, Kévin Insixiengmay, André Assouline (HEC Paris).
Hitachi Ltd, a Japanese conglomerate, announced that they are acquiring Silicon Valley-based software development company GlobalLogic for $9.6 billion, marking the acquisition as the largest within the product engineering services industry. Now more than ever, digital transformation is a priority for companies, and Hitachi’s acquisition bolsters the company’s confidence in expanding its services with data-driven business models and improving customer experiences. Canada Pension Plan Investment Board and Swiss private equity firm Partners Group Holdings each have a 45% stake in the company, whilst individuals and other executives working in the company hold the remaining 10%. The Japanese industrial company announced that the acquisition will create synergies across all their sectors including IT, Energy, Industry, Mobility, and Smart Life, as the digital engineering capabilities and the strong client base that GlobalLogic offers are rising sharply. The transaction is expected to complete by the end of July 2021.
Overview of Hitachi (Acquirer)
Hitachi, a large Japanese Conglomerate, now has 864 subsidiaries in industries from information systems and social infrastructure to automotive systems and home appliances. With more than 100 years of operations, the company survived the Second World War and benefitted from the defense contracts of the Korean War.
Hitachi’s product line can be broadly categorized into communications and electronic equipment, heavy electrical and industrial machinery, and consumer electronics. They have expanded their manufacturing capacities to include nuclear power systems due to anticipated market trends. On the global front, their subsidiaries in wire and cable, metal, and chemical industries have consistently brought their brand name to consumers’ doorsteps.
Historically, Hitachi has pursued numerous acquisitions to expand its footprint and quality of the product. Metals, magnetic material, cable, and water treatment are industries entered by Hitachi through an acquisition. The management is well equipped to continue this trend of disrupting the market with well-equipped partnerships.
Overview of GlobalLogic
GlobalLogic is a digital product services engineering company, privately held by Partners Group and CPP Investment Board. It is a full-cycle development services leader that combines chip-to-cloud software engineering and industry experience to help customers “design, build, and deliver” their products.
GlobalLogic operates design studios and engineering centers around the world, extending our deep expertise to customers in the communications, financial services, automotive, healthcare & life sciences, technology, media and entertainment, manufacturing, and semiconductor industries.
The company has a solid client base with over 400 clients comprised of market leaders and marquee brands spanning key industries such as communications, financial services, automotive, healthcare & life sciences, technology, media and entertainment, and manufacturing.
This deal will enable Hitachi to leverage many synergies through the combination of both activities, fueled by digitalization.
Hitachi will FIRST get access to the rising market of B2B digital services. The Japanese conglomerate should benefit from Globalogic’s staff expertise and strong technological support. The pooling of R&D resources from the two companies, allowing technological synergies, will help Hitachi achieve the transformation towards digitalization. IT, energy, mobility, smart life, and automotive markets are the targeted sectors that Hitachi’s management wants to address with the powerful technology acquired.
Secondly, this deal should result in a substantial gain in market power. While Hitachi is mainly based in Japan (50% of its activities), Globalogic’s activities focus more on the US market. This deal offers then an opportunity for internationalization, meaning more potential sales and an increase in market share. Acquiring the large customer base of Globalogic, which includes 400 global market leaders among key target industries, will allow Hitachi to promote its products and negotiate promising contracts with those companies.
Gajen Kandiah, chief executive officer of Hitachi Vantara, and Shashank Samant, CEO of GlobalLogic made clear during a live interview with Bloomberg what their vision is: they expect GlobaLogic’s expertise in digitalization to transform Hitachi’s already existing products by integrating new technological features such as cloud and software integration.
The digital links between these integrated products will make it more interesting to accumulate Hitachi equipment since they will henceforth provide more efficiency when used together. Such transformation will set the stage for cross-selling products thus resulting in an intensive growth of sales among already established clients.
Risks and Uncertainties
Such a huge conglomerate acquiring a digital service engineering company may lead to synergies as digital industries’ growth has been skyrocketing during the past years. But it also entails certain risks.
Firstly, if Hitachi integrates vertically its value chain by using B2B digital platforms the company might find it difficult to create synergies since GlobalLogic’s services need to be consistent when matched with Hitachi’s customers and businesses.
Secondly, another risk related to digitalisation is that, even though it usually fosters collaboration and increases efficiency in a company, experience has sometimes shown that digitalization may result in a lack of coordination.
Thirdly, IT, energy, and automotive markets which are the ones supposed to be more impacted by digitization may also suffer from severe disruption due to covid, therefore hindering the implementation of synergies as well as the potential market share gain resulting from this acquisition. Indeed, mobility restrictions that have been set up by governments have hampered these industries’ activities. Therefore, revenues and synergies may stagnate in the upcoming months. Eventually, the costs to make this acquisition and merge efficiently these two companies might outweigh its benefits.
Lastly, another indicator that may raise some concerns is the total interest-bearing debt of Hitachi after the completion of the deal which now amounts to $28B as the acquisition was financed through cash holdings and debt issuance. Nevertheless, the group stated that they’re expecting to sell some subsidiaries to reduce the company’s current debt which amounts to a staggering 4.5x EBIT (2020).