July 25, 2006 2:23 PM PDT
HP snaps up Mercury Interactive
"I am confident that this transaction means HP is building a software business that must be reckoned with," Mark Hurd, HP's chief executive officer, said in a conference call following the announcement.
The idea appears to blend HP's OpenView systems and network management software for data centers with Mercury's products for managing application development. HP has been focused on improving the quality and breadth of its software offerings over the past year, Hurd said.
IT managers are increasingly using virtualization capabilities with their servers and storage devices, and they need sophisticated management software to keep track of such a complex operation, Hurd said. The Mercury deal is part of HP's discussions in the past about "building an ERP (enterprise resource planning)-like capability for the management software market," he said.
At the same time, IT departments need to try to save money at every turn, Ann Livermore, executive vice president in HP's Technology Solutions Group, said in an interview following the conference call. Combining HP and Mercury software will allow IT teams to get much more out of a single product than they could from purchasing two separate products, she said.
Mercury's software gives HP the capability to compete more effectively against software powerhouses like IBM and CA, Chris Foster, an analyst at Technology Business Research, said in an e-mail. "Mercury fits into one of HP's three major strategic objectives--manage/consolidate the next-generation data center," he wrote.
Only IBM will have a broader portfolio of software resources than HP after it finalizes the acquisition, said Stephen Elliot, an analyst at IDC. Other companies like CA and BMC Software, which compete against HP in IT management software, don't yet have the variety of software products that HP would add with Mercury on board, he said. These include test and development, IT governance, service-oriented architecture (SOA) and application management products, he noted.
IBM's position among SOA developers was an especially key area that HP needed to address, said Charles King, an analyst at Pund-IT. Big Blue recently reported higher-than-expected earnings based on strong growth of its SOA products. Mercury gives HP the SOA tools it lacked prior to the deal, he said.
The deal, when completed, will increase the size of HP's annual software business to $2 billion in revenue, the companies said. Current Mercury CEO Tony Zingale will stay with HP throughout the rest of the year and through the "medium term," he said on the conference call. The Mercury business group will report to Thomas Hogan, senior vice president of software for HP, which is based in Palo Alto, Calif.
Integrating the two product lines should be relatively easy because there is little overlap between Mercury's software and HP's products, Livermore said.
Elliot agreed, saying the real hurdles in the deal will be managing the transition with Mercury's loyal customers and making sure it integrates the employees involved at the two different companies. "One of the challenges is keeping the staff motivated and keeping the staff around, and making sure they keep the right reporting structure in place when they do make changes," he said.
HP has not yet determined its plans for staffing levels following the completion of the acquisition, Livermore said. Mercury has about 3,000 employees as of Tuesday, she said.
Mercury, based in Mountain View, Calif., has had its fair share of problems with the Securities and Exchange Commission over the past few years. It was one of the first companies named in the stock-option backdating scandal that has plagued several technology companies. In November, three Mercury executives, including former CEO Amnon Landan, resigned following an internal investigation.
Hurd said HP had taken a close look at Mercury's current situation and pronounced itself satisfied with the results. "We look at whether (potential acquisitions) make strategic sense, financial sense and operational sense. In this case, this acquisition made all three."
HP's shares were down almost 4 percent, or $1.23, at $30.10 in after-hours trading. Mercury's stock was delisted from the Nasdaq earlier this year, and its shares trade on an over-the-counter market. Those shares closed at $39 Tuesday, ahead of the announcement.
HP itself is in a much stronger position these days, having regained some of its momentum over a year after Hurd was brought on board, King said. "It's a great time for a company like HP, that's been moving pretty well for the last year or so, to make some investments like this, make an investment today that's going to benefit it over the longer term," he said.