Riding off into the Sunset : Geometric Ltd.

In one of the largest acquisitions in the engineering services space, Shiv Nadar’s HCL Technologies Limited (HCL) a leading global IT services provider announced on April 1, 2016, that it was purchasing the IT services business of Geometric Ltd for Rs 1,300 crore. In a separate transaction, Geometric has also agreed to offload its ownership stake of 3DPLMSoftware Solutions Ltd. (3DPML) to Dassault Systems, the current joint venture partner of Geometric in 3DPLM.

HCL’s acquisition of Geometric is the second-largest buyout deal in the domestic IT space after Tech Mahindra acquired a controlling stake in Satyam for Rs 2,900 crore in 2009. 

Geometric Ltd.  – The demerged company

Founded in 1984, Geometric is a specialist in the domain of engineering solutions, services, and technologies. Its portfolio of Global Engineering services, Product Lifecycle Management (PLM) solutions, Embedded System solutions, and Digital Technology solutions enables companies to formulate, implement, and execute global engineering and manufacturing strategies aimed at achieving greater efficiencies in the product realization lifecycle.  It also has Joint Venture with Dassault Systèmes (Dassault). Its consolidated revenue for 2014-15 was Rs 1,105 crore. In fact, 73% of the consolidated turnover of Geometric was generated from the demerged undertaking.

HCL Technologies (HCL) – the resulting company

Emerged as an independent company in 1991, HCL Technologies Limited is a multinational IT services company, headquartered in Noida, Uttar Pradesh and a subsidiary of HCL Enterprise. Its revenue for 2014-15 was Rs 36,701 crore.

3DPLMSoftware Solutions Ltd. (3DPML) – The Joint Venture

Formed in 2002, as a Joint Venture between Geometric Ltd. and Dassault Systèmes, it works on research and development and services related to Dassault’s 3DEXPERIENCE platform and brand applications.

Dassault Systèmes (Dassault) – The Co-venturer

Dassault Systèmes, the 3DEXPERIENCE European multinational Company, provides business and people with virtual universes to imagine sustainable innovations. Its world-leading solutions transform the way products are designed, produced, and supported. 3DEXPERIENCE, the Compass logo and the 3DS logo, CATIA, SOLIDWORKS, ENOVIA, DELMIA, SIMULIA, GEOVIA, EXALEAD, 3D VIA, BIOVIA, NETVIBES, and 3DEXCITE are registered trademarks of Dassault Systèmes or its subsidiaries in the US and/or other countries.

Rationale

Demerger

1. It strengthens HCL’s presence significantly, widen the markets and expertise in the PML consulting as well as manufacturing engineering space.
2. Benefits from a team of highly skilled professionals
3. Acquisition of several unique intellectual properties in PML and digital manufacturing space
4. It will help create upsell and cross-sell opportunities along with a unique blend of services and solutions and portfolio of end to end engineering and R&D capabilities across the full product lifecycle.

Merger

1. Changes in technology and the consequent evolution of software development would require a very tight and close integration between the research and development centers of Dassault.
2. A new level of strategic phase in the contribution of 3DPLM to Dassault’s strategic research and development operations.
3. Provide the shareholders of the Geometric an opportunity to directly participate and receive listed Redeemable Preference Shares of 3DPML as consideration.

Transaction structure

The transactions are part of a composite scheme whereby Geometric’s business is being demerged to HCL Technologies Ltd, while simultaneously merging Geometric’s stake in 3DPML into 3DPML. The Appointed Date of the Scheme is March 31, 2016.

The details are as follows-

1. Demerger of IT-enabled engineering services, PML services, and engineering design productivity software tools including the direct/indirect overseas subsidiaries of Geometric Ltd, except for the 58% stake held by Geometric in 3DPML Software Solutions Ltd (Joint Venture with Dassault Systemes) based on the audited financials as on 31st March 2015,The consideration will be discharged by way of issue of 1,56,40,546 listed fully paid up equity shares of Rs. 2 each by HCL to the shareholders of Geo based on the swap ratio of 10:43.

2. The merger of the remaining undertaking of Geometric Ltd. with 3DPML Software Solutions Ltd. thereby canceling the Geometric’s stake, giving 100 percent ownership of 3DPLM to Dassault. Effective consideration received per equity share of Geometric works out to Rs 68. There are two scenarios-
   1. If RBI approval is received
      3DPLM will issue one listed 7% Redeemable Preference Share (Redeemable in 15 months but every quarter they would be redeemable at the choice of the shareholder and they are going to be listed) of Rs 68 for everyone fully paid up equity share to the resident and non-resident shareholders of Geometric.
   2. If RBI approval is not received
      3DPLM will issue 24 fully paid unlisted equity share of Rs 10 each for every 1,793 fully paid up equity shares of Rs 2 each of the company held by such shareholders which shall be compulsorily purchased by Dassault immediately on issuance at a price of Rs 5,080.30 per equity share.

Analysis

Even on a consolidated basis, Geometric has grown by just 1% in the top line in FY 2015 and net profit for FY 15 of 55.17 crores is less by 20% as compared to a profit of Rs. 68.7 crore for FY 2013. So both in terms of top line and bottom line, the company is not able to scale up. So the only option left for the management of Geometric to go for some inorganic route or exit and hand over the business to some strategic acquirer. As far as its 58% stake Joint venture with Dassault, it needs to exit that business by selling that stake or give consideration to its shareholders by way of shares in the joint venture company directly.

Consideration for its stake in JV is valued at Rs. 68 and which is fixed so, value for core business is worked out as follow:-

SN	Particulars	Rs./share
A	Price of Geometric on the date of announcement	196
B	Value per share of Demerged Geometric (HCL)	191
C	Value per Preference share of 3DPML	68
D	Total value per share of Geometric after the deal	259
E	Shareholders’ Gain (D-A)	63
F	Shareholders’ Gain %	32%

At the end of the deal, shareholders of Geometric will be left with its stake in HCL and cash of Rs. 68, if they encash preference shares.  Considering premium of 32% it seems like a good deal for them.  From the perspective of HCL, it acquired a business with a turnover of Rs. 801 crore in FY 15 for total consideration of Rs. 1300 crore which comes to about 1.6 times the turnover and PE multiple of 23 as against its own PE multiple of 18. But upon completion of this merger, HCL Tech will generate $1.34 billion from engineering services and become the world’s third-largest technology engineering outsourcing company. Considering its own turnover it can only be considered as bolt-on acquisition to fill some customers and technology gap and in the process having possibilities to upsell/cross-sell as mentioned above in rationale and create value for its own shareholders.

As per the interview with Manu Parpia, Founder, and CEO of Geometric Ltd., “The JV had a sole client, which was Dassault Systemes. Having a single customer is not viewed as value accretive. Geometric’s growth in the venture had stagnated and it was wise to part amicably”. Dassault will now look for some new joint venture partner for its India operations or may run it as a wholly owned subsidiary.