HP Pays Hefty Price to Build Software Business

In an effort to shore up its software business, Hewlett-Packard (News - Alert) on Tuesday has agreed to purchase Mercury Interactive, a leading IT management software vendor, for a total price of approximately $4.5 billion – the largest strategic acquisition that HP has made in the last few years.

The price is equivalent to $52 a share for Mercury Interactive shareholders, a hefty 33 percent premium based on Tuesday’s closing stock price. Upon closing, HP will fold Mercury Interactive’s portfolio of IT management software into its HP Software division, which includes the OpenCall, OpenView IT Service Management (ITSM) and OpenView Operational Support Services (OSS) lines headed by Senior Vice President Tom Hogan.

“Mercury is the first transaction of this size that we’ve made in a number of years,” HP President and CEO Mark Hurd told the media. To be sure, the company official added that HP isn’t expected to continue with M&A transaction of this magnitude.

The deal comes as vertical markets such as telecom industry accelerate the deployment of standardize hardware architecture, allowing for greater interoperability between machinery so long as the underlying software can communication with one another. During a conference call to detail the transaction, Hurd emphasized this latest acquisition illustrates HP’s commitment to building a “software business to be reckoned with.”

The transaction brings together HP OpenView systems, network and IT service management software with Mercury's application management, application delivery, IT governance and service-oriented architecture governance platforms.

“This portfolio of capabilities will allow CIOs to reduce costs and measure program effectiveness, enabling IT to once again be a “business enabler,” Hurd said.

The Mercury acquisition is expected to increase the size of the HP Software business to more than $2 billion in annual revenue. Immediately following the close of the transaction, both companies' sales forces will begin reference-selling each others' products.

As for the financial impact, HP “forecasts that on a non-GAAP basis, the combined HP Software business will deliver revenue growth of approximately 10 percent to 15 percent and operating margin of approximately 20 percent in fiscal year 2008. On a pro forma basis, the transaction is expected to be approximately $0.04 dilutive to non-GAAP per share earnings in fiscal year 2007 and approximately $0.02 accretive to non-GAAP per share earnings in fiscal 2008. This includes purchase accounting adjustments related to deferred revenue write downs and deferred compensation expense of approximately $141 million, or $0.05 per share, in fiscal 2007 and approximately $43 million, or $0.01 per share, in fiscal 2008, as well as expected synergies.”

HP expects the merger to close in the fourth quarter of calendar year 2006.

----

Robert Liu is Executive Editor at TMCnet. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg. For more articles, please visit Robert Liu's columnist page.

[ Back To TMCnet.com's Homepage ]