Tag: HPQ

Comings, goings and growings in the data-warehousing market

Brenon Daly

Contact: Brenon Daly, Matt Aslett

Over the past two and a half years, tech giants such as Microsoft, IBM and EMC have all inked major data-warehousing (DW) acquisitions, running up a collective bill of some $2.5bn. All that time, Hewlett-Packard stayed out of the shopping spree, opting to develop its own DW offering in-house. On Monday, HP conceded that those efforts haven’t generated the return that it was looking for, and indicated that it would phase out sales of its Neoview product.

HP is expected to continue its DW-related partnerships, including a recently announced accord with Microsoft to deliver four new data appliances. On its own, however, HP wasn’t able to capture much business in the fast-growing DW market, in part because the company approached it as a services play. (My colleague Matt Aslett noted some of the struggles HP was having with Neoview in a recent report, where he indicated that if HP was serious about DW it should have either reached for Netezza or made the big move for Teradata.) It couldn’t have helped Neoview, either, that it was so closely associated with former CEO Mark Hurd, who is being erased as quickly as possible from HP since his unceremonious departure last summer.

HP’s shift away from directly focusing on the DW market comes as Teradata enjoys its richest-ever valuation. (Shares of Teradata, which is the largest and most-visible DW vendor, have jumped about 60% over the past year, giving the company a $7.7bn valuation.) We’re also hearing that Teradata may be looking to do a deal of its own. Having just closed its purchase of Aprimo to get into the business application market, the buzz is that Teradata will shift its M&A focus back to its basic business, perhaps picking up additional analytics and other DW technology.

2010: not the year it could have been for tech M&A

Brenon Daly

Contact: Brenon Daly

Looking back on dealmaking in 2010, it strikes us that it wasn’t the year that it could have been. With the recession (officially) behind us and many tech companies’ stock prices and cash hoards hitting record levels, we might have thought M&A last year would rebound to pre-Credit Crisis levels. That wasn’t the case.

In 2010, we tallied some 3,200 transactions – a slight 7% increase over the number of deals in the recession-wracked years of 2008 and 2009. In the far more important measure of tech M&A spending, the $178bn in 2010 represented a substantial 21% jump from 2009 levels. But it’s just half the annual amount we saw from 2005-2008. (In fact, the spending in the second quarter of 2007 alone eclipsed the full-year total for 2010.)

Looking deeper at last year’s activity of some of the key tech corporate buyers, we begin to see a partial reason for the muted overall spending, at least compared to pre-Crisis years. Yes, stalwarts like IBM and Hewlett-Packard continued their shopping sprees in 2010. Collectively, that pair announced 23 transactions worth a total of $11.1bn. But other tech bellwethers weren’t so quick to sign deals last year.

Microsoft announced just two purchases in 2010. Symantec sat out the entire second half of 2010 – a period, we might note, that saw its largest rival, McAfee, get snapped up. Cisco Systems did fewer deals in 2010 than in 2009. Included in the list of 2009 transactions for the networking giant were a pair of $3bn acquisitions (Starent Networks and Tandberg), while the largest deal Cisco announced last year was the $99m pickup of CoreOptics.

And although Dell was in the news often for M&A last year, both on successful and unsuccessful transactions, its overall activity basically kept pace with recent years. However, the company’s landmark purchase of 2010 (the $960m acquisition of Compellent Technologies) only ranks as the third-largest deal Dell has made since it jump-started its M&A program in mid-2007.

IBM and HP bag big game on M&A safari

Brenon Daly

Contact: Brenon Daly

With the news today that Hewlett-Packard is closing its recent pickup of Fortify Software, we wanted to take the opportunity to point out that the deal almost belongs in the minority of M&A moves HP has made so far this year. What are we talking about? Basically, that the tech giant has been doing giant deals. Of the seven acquisitions HP has announced so far in 2010, fully three of them have been valued at more than $1bn.

We noted in mid-April, which is before it inked any of its three 10-digit acquisitions, that HP had telegraphed to the market that it was going to do fewer transactions, but they were going to be bigger deals. (And we should add that its purchase of application security vendor Fortify wasn’t just a pocket-change deal. We understand that it paid $275m or so for the company.)

What’s interesting to note is that in the five months since we indicated that HP would be big-game hunting, one other company has joined it on safari: IBM. Big Blue has inked a pair of deals valued at more than $1bn since April – the pickup of AT&T’s Sterling Commerce business as well as Monday’s purchase of Netezza. Along the way, it has also done a steady flow of transactions valued at $150m-500.

Altogether, we calculate the tab for Big Blue’s five-month shopping spree at roughly $4.8bn for its nine acquisitions. (Incidentally, the amount of cash it spent is basically the same amount its business generated over that same period.) Meanwhile, HP spent about $1bn more ($5.8bn in disclosed or estimated deal values) on its seven purchases since mid-April. Taken together, these two companies have averaged about $2bn of M&A spending in each of the past five months. And they were sniping at each other about ‘buying’ R&D? Really?

M&A activity since mid-April 2010

Company Number of acquisitions Total M&A spending
HP 7 $5.8bn*
IBM 9 $4.8bn*

Source: The 451 M&A KnowledgeBase *Includes disclosed and estimated deal values

A bit of Big Blue inconsistency

Brenon Daly

Contact: Brenon Daly

Perhaps Mark Hurd feels vindicated. No, we’re not referring to the former Hewlett-Packard chief executive settling a lawsuit with his old shop. Instead, we’re talking about IBM’s stunning flip-flop with regard to high-profile M&A by itself and rival HP. At the least, Big Blue’s recent comments now appear inconsistent; at the worst, they smack of hypocrisy.

The specifics: A week ago, Big Blue’s CEO was blasting HP for ‘overpaying’ for deals, and for relying on M&A rather than R&D. Ironically, Sam Palmisano made these comments just as his own company was putting the final touches on its acquisition of Netezza, a deal that values the data-warehousing vendor at nearly 7 times this year’s forecasted sales for the current fiscal year. That’s more than twice the median software valuation, and basically matches the valuation that HP is handing over for ArcSight.

Incidentally, both transactions valued the targets, which had only come public within the past three years, at their highest-ever valuations. But if we look at how the shares of ArcSight and Netezza have performed so far this year, it becomes very clear that IBM was the much more aggressive suitor. Excluding the pop ArcSight shares got when word of a deal leaked in late August, the security vendor’s stock had only ticked up about 10%. In contrast, Netezza stock had run 150% from January to the day before Big Blue announced its purchase.

A hoarse auctioneer for 3PAR?

Brenon Daly

Contact: Brenon Daly

The back-and-forth bidding for 3PAR moved higher again Friday, as the counteroffer to the counteroffer pushed the value of the high-end data storage vendor to $2bn. In the latest move, Hewlett-Packard lobbed a bid of $30 for each share of 3PAR, topping its offer from Thursday of $27 per share that had been matched by Dell. If 3PAR opts for HP’s bid, Dell has three days to come back with an offer of its own, according to terms. Dell, which opened the process 10 days ago with a bid of $18 per share, has already matched two efforts by HP to derail the deal.

As is pretty much always the case when would-be buyers with deep pockets go against each other, the price of the target company moves higher. (It’s fundamental supply-and-demand economics, after all.) Yet in the case of 3PAR, we’re not talking bids that are sweetened with a teaspoon or two of sugar – we’re talking cups of the stuff. (To recap the investment banks that are helping to advise their clients on how much sugar to dole out: Qatalyst Partners is banking 3PAR, while Credit Suisse Securities is banking Dell and JP Morgan Securities is banking HP.)

The latest offer values 3PAR at basically $830m higher than the opening takeout valuation, which was already the highest the storage company had ever seen. (In fact, Wall Street valued 3PAR at less than $800m before all this bidding started. Shares had basically bounced around $10 each for most of the year.) HP’s offer gives 3PAR an equity valuation of $2bn, two-thirds higher than Dell’s initial bid that gave it a $1.25bn equity valuation. For those wondering about the ‘price discipline’ at the two suitors, we would note that the going rate for 3PAR is now 10 times trailing sales.

Why wouldn’t HP jump the McAfee bid instead?

Brenon Daly

Contact: Brenon Daly

If we had to guess about Hewlett-Packard making an uncharacteristic move and jumping an announced transaction, we would have thought the company would go after McAfee rather than 3PAR. After all, HP has a giant hole in its security portfolio (we might describe it as a ‘McAfee-sized’ hole), while it’s already pretty well covered on the storage side, even if much of its offering is a bit long in the tooth.

Yet that isn’t the way it’s playing out. The recently decapitated company offered $1.7bn earlier this week for 3PAR, adding roughly $410m, or 33%, to the proposed price of the high-end storage vendor. Meanwhile, McAfee’s planned $7.8bn sale to Intel, announced last week, continues to track to a close before the end of the year. (We would note that McAfee is being valued at 3.4 times trailing sales, exactly half the level of 3PAR following HP’s bumped bid, which took the valuation to 7.6x trailing sales.)

HP’s topping bid for 3PAR appears to be a fairly defensive move. For starters, there’s the matter that 3PAR would overlap more than a little bit with its existing core storage offering called StorageWorks Enterprise Virtual Array. Betting on an acquired property to replace – or at the very least, refresh – the heart of a company’s current offering is a risky proposal. On top of that, 3PAR would require a new architecture, rather than just running on top of HP’s existing hardware like its other software-based storage acquisitions (PolyServe, IBRIX and Lefthand Networks).

All in all, looking to derail Dell’s offer for 3PAR appears to be at odds with much of HP’s previous strategy and rationale around storage. And while it pursues that deal (cost what it may), HP passes on McAfee, a one-of-a-kind security asset that would instantly make it much more competitive with IBM, EMC and Cisco Systems. If HP has sincere aspirations about outfitting the next generation of datacenters, we might suggest that it needs to actually own its intellectual property (IP) for security.

So far, however, HP has been content with just OEM arrangements to cover itself for security. (Notably, it has extracted a fairly one-sided agreement with Symantec for consumer anti-malware protection.) And even though buying McAfee would mean an unraveling of a number of those arrangements, we would note that reality isn’t preventing HP from making its bid for 3PAR. Remember that HP currently has an OEM arrangement with Hitachi Data Systems for a high-end offering like 3PAR. Yet it’s prepared to pay – and pay a lot of money – to own the IP itself. Couldn’t the same rationale be used for McAfee?

There’s only one 3PAR

Brenon Daly

Contact: Brenon Daly

Let’s see, where have we heard this before? A storage company with hundreds of millions of dollars in revenue finds itself in a billion-dollar bidding war between two tech giants, advised in the process by high-end boutique Qatalyst Partners. Last summer, scarcity value drove the price of Data Domain; today it’s 3PAR.

Looking to trump Dell’s existing agreement for 3PAR, Hewlett-Packard on Monday lobbed a topping bid for the high-end storage provider. HP, advised by JP Morgan Securities, is offering $24 for each share of 3PAR, giving the proposed transaction an enterprise value of $1.56bn. (That’s according to our math, compared to the $1.66bn that HP gives its bid.) In any case, the offer is some $380m, or 33%, richer than Dell’s initial bid. Recall that Dell’s offer of $18 valued 3PAR at the highest level ever for the stock.

One interesting observation about HP’s topping bid: it is exactly the same percentage (33%) that EMC had to hand over for Data Domain, which had agreed to sale to NetApp. Of course, this is HP’s first counter, while EMC had to bump its own bid. (Initially it offered $30 for each Data Domain share, but ultimately paid $33 per share when it closed the deal in July 2009.) Of course, there was little hope of NetApp matching EMC in a bidding war for Data Domain. In the case of 3PAR, however, rivals Dell and HP are on much closer financial footing. Terms of Dell’s original agreement with 3PAR call for a $53.5m breakup fee

Hurd to join PE herd?

Brenon Daly

Contact: Brenon Daly

With this latest scandal, it’s clear that executives at Hewlett-Packard have lost their way from the ‘HP Way.’ The fairness and mild-mannered approach that once characterized the tech giant has been replaced by a leadership that in recent years has either engaged in or condoned spying, padded expense accounts and played out their own version of Dangerous Liaisons with a former actress in soft-core movies. (Although we’ve been assured that those get-togethers were not sexual, bien sur). Where leaders of HP were once patrician, they now look paranoid; once venerable, they now look venal.

Not that such ineptness and indiscretion will necessarily hurt erstwhile executives from HP. First, it was Carly Fiorina. Despite a largely vacuous tenure that included a misguided purchase of Compaq (not to mention an even more misguided attempt to buy PricewaterhouseCoopers a decade ago), Fiorina is now as likely as not to find her way to the US Senate, representing the most populous and influential state in the union. We suspect that Fiorina’s successor – the recently dispatched Mark Hurd – will likewise land on his feet.

Our guess as to where he’ll work? Private equity (PE). If we think about it, Hurd has already shown many of the skills required to work in a buyout shop. He’s overseen acquisitions of fallen businesses of questionable relevance (3Com) and even questionable viability (Palm Inc). He’s wielded a sharp knife in the name of operational efficiency, trimming tens of thousands of workers from the HP payroll as well as services giant EDS, the $13.9bn purchase two years ago that stands as Hurd’s legacy deal.

And finally, as some critics might point out, Hurd has also demonstrated a PE-style ability to line his own pockets all the while. Despite acknowledging that he failed to live up to HP’s code of conduct – a code, incidentally, that he trumpeted – Hurd’s severance package will give him some $12m in cash plus equity compensation that could be worth twice that amount. To be fair, some of the golden parachute comes from the fact that HP shares have doubled during Hurd’s tenure. And in the end, it’s his Wall Street performance, rather than his corner office peccadilloes, that could very well find him in demand at a buyout shop.

HP: relentlessly reaching for Palm

Brenon Daly

Contact: Brenon Daly

As Hewlett-Packard prepares to report fiscal second-quarter results after the close of the market today, there’s already been an SEC filing related to the tech giant that has attracted a fair amount of interest. That document is the proxy statement for HP’s pending acquisition of mobile OS maker Palm Inc. The background on the deal shows that despite Palm being in a fairly vulnerable financial position, the company managed to attract significant interest.

Perhaps reflecting Palm’s dwindling cash and overall dimming outlook, the $1.2bn deal came together with almost unprecedented speed. It took just two months for the acquisition to transpire. The target – along with law firm Davis Polk & Wardwell and financial advisers Goldman Sachs and Qatalyst Partners – winnowed an initial list of 24 possible suitors to just six companies, including HP, in quick order.

According to the proxy, there were two primary bidders besides HP for Palm, along with other parties that were interested in all or just some of the vendor’s patents. HP initially offered $4.75 for each share of Palm, about one dollar less than the $5.70 per share that it ended up paying for it two weeks later. The reason for the bump? A bid of $5.50 per share from an unidentified suitor, referred to as ‘Company C’ in the proxy.

Palm’s down

Brenon Daly

Contact: Brenon Daly

Just two weeks ago, we wrote that we thought Palm Inc would be a tough sell because the cash-burning smartphone pioneer seemed mired in irrelevance, both to consumers and developers. OK, so we were a bit off on that. The company apparently appeared relevant enough to Hewlett-Packard for the tech giant to hand over more than $1bn in cash for Palm.

While Palm’s board has backed the deal, it appears to be a bit of a tough sell to the company’s shareholders, who have bid Palm stock above the offer since it was announced. From their perspective, anyone who bought the stock over the past year – with the exception of a period from roughly mid-March to mid-April – is underwater, despite the 23% premium offered by HP. Palm shares changed hands at twice the level of HP’s bid for most of January.

But then, valuing Palm has always been tricky, going back to its fitful birth on the Nasdaq as a spin-off from 3Com. (As a side note, HP’s pending pickup of Palm would reunite the smartphone company with its former parent, as HP just closed its purchase of 3Com three weeks ago.) When the tiny stake of Palm hit the market in early 2000, investors were pushing each other out of the way to get their hands on Palm (if you will). The company finished its inaugural day on the Nasdaq at a valuation of some $50bn – roughly twice as much as Apple was worth at the time. Today, Apple fetches a market cap of $250bn, while Palm just sold for $1.4bn.