HP Buys Mercury in Biggest Acquisition Since Compaq

In its biggest acquisition since the controversial takeover of Compaq nearly five years ago, Hewlett-Packard said Tuesday it would buy Mercury Interactive for US$4.5 billion.

HP said the cash deal would let it sell complete data center solutions that include servers, storage and other hardware, as well as the software to manage and tie together the various components.

Hurd Making His Mark

The deal also represents the first major purchase for HP under new CEO Mark Hurd, who is already winning strong reviews for his efforts to streamline the company. HP has become more competitive with longtime low-cost leader Dell, making a dent in its market share lead.

Mercury’s products will become an HP-branded portfolio of information technology management software and services, according to HP.

“Today, we are combining two market-leading businesses to create the most powerful management software portfolio in the industry,” Hurd said. “Together, they will help customers cut their IT costs, speed the delivery of new services, and drive profitable growth at HP. We expect this important acquisition to deliver significant value for our shareholders.

“HP is building a software business that must be reckoned with,” he commented in a conference call to discuss the deal.

With Mercury in the fold, HP said, its annual software revenue will top $2 billion.

The timing of the deal raised some eyebrows, since Mercury is embroiled in a controversy surrounding stock options grants to high-ranking executives. Mercury has already restated its financial results for the years 2002, 2003 and 2004, and the Securities and Exchange Commission might be pursuing civil charges against some executives. Mercury lost its spot on the Nasdaq stock exchange as a result of its restatement.

New Deal, Old Memories

The deal creates a leader in the “business technology optimization software” category, said Mercury CEO Tony Zingale. “A deal of this magnitude creates significant opportunities for our customers, our shareholders, our people and our partners,” he added.

Mercury’s products will be offered alongside HP’s OpenView systems, with Mercury bringing expertise in application management, application delivery, IT governance, and service oriented architecture (SOA) governance.

The Mercury addition underscores the company’s goal to be “the clear leader in end-to-end enterprise IT management,” declared Thomas E. Hogan, senior vice president of HP’s software unit.

While the acquisition invites comparisons with the Compaq buy, there are several differences, starting with the $4.5 billion price tag — HP is paying cash for Mercury — which is a fraction of what HP paid for Compaq. The deal also appears less controversial, in general, with the Compaq purchase sparking a months-long legal drama and internal strife that may have directly contributed to CEO Carly Fiorina being forced out at HP.

That made room for Hurd, who was hailed as a turnaround specialist and who already has improved HP’s margins and made significant gains on Dell.

New Competitors

The acquisition puts HP into direct competition with some tech heavyweights in the data management space, including IBM and CA, the company formerly known as “Computer Associates.”

There ought to be plenty of room for all three, with research firm IDC saying the market will grow to be worth nearly $2 billion annually by 2009. Others have designs on the same dollars, however. Storage giant EMC has invested heavily in software firms in recent years to give it a more complete information storage and management suite.

The buy fills in some gaps in HP’s offerings and puts it on more equal footing with IBM, especially in the SOA realm, said Pund-IT Research analyst Charles King.

“Against IBM, HP is weak on software and services. They are taking the market lead, in terms of revenue, from IBM this year, and they want to sustain that lead,” said Enderle Group principal analyst Rob Enderle.

“HP, by all accounts, is now running well enough that they can focus on building the company out again. In this business, you either grow or shrink; IBM and Sun are on the shrink path,” Enderle added. “HP wants to be able to say they are going in the other direction — and to do that, they need to increase their capabilities where they are comparatively weak. This appears to do that — and I wouldn’t expect this to be the end of this process.”

The deal differs vastly from the Compaq purchase, according to Enderle. “Compaq was another large hardware company, lots of overlap at all levels,” he noted. “This will have overlap with centralized services, but not a great deal of overlap elsewhere. Compared to Compaq, this should be a walk in the park. Mergers are always more difficult then they initially seem, but compared to Compaq, this one should be vastly easier,” Enderle concluded.

The SEC investigation and restatement issues that have dogged Mercury may have actually made the deal possible, continued Enderle. “It removes a lot of the traditional executive conflicts, and Mercury’s board clearly wanted out of that mess as quickly as possible,” he said. “In effect, it put the price of Mercury well below its value to someone like HP, making it both an easy buy and a relatively easy merger to do.”

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