In-Depth

HP Bets Big on Software with Mercury Interactive Purchase

By putting $4.5 billion of its money where its mouth is, has HP finally put the lie to the canard that it isn’t serious about software?

• By Stephen Swoyer
• 08/01/2006

Judging by the amount of public relations spin and public feedback, Hewlett-Packard Co.’s (HP) acquisition last week of data center management specialist Mercury Interactive Corp. is definitely having an impact on its system and network management rivals.

HP is spending $4.5 billion for Mercury Interactive, a provider of governance, systems management, and business technology optimization (BTO) software. Officials say the acquisition will finally put to rest the allegation that HP isn’t serious about software. "I am confident that this transaction means HP is building a software business that must be reckoned with," HP chief Mark Hurd told attendees in a conference call about the announcement.

In a certain sense, Computer Associates International Inc. (CA), BMC Software Corp., IBM Corp., and other vendors have had months to brace themselves for HP’s move. The prospective union of the two companies had long been the subject of speculation. “Rumors have been flying around this acquisition for at least the past 8 months,” according to veteran industry watchers Richard Pak and Jasmine Noel, of Ptak, Noel, and Associates. The pair notes that Mercury Interactive’s financial woes—the company’s CEO and CFO resigned late last year following an SEC investigation into MI’s accounting methods, and MI itself was delisted from the Nasdaq earlier this year—also helped make the company a ripe target for takeover. “These became even stronger with the shadow that fell over [Mercury Interactive’s] senior management and the company last fall.”

Why, then, might HP’s competitors have cause for alarm? For one thing, industry watchers note, Mercury Interactive has remained an ambitious competitor in spite of its SEC woes. The company acquired the former Systinet (an SOA specialist) earlier this year for $105 million, and last month ponied up nearly $20 million to acquire technology assets and R&D staff from Vertical Solutions Inc. and Tefensoft, respectively.

In its bread-and-butter business technology optimization (BTO) space, Mercury remains a formidable competitor. Better still—as far as HP officials are concerned, anyway—Mercury should boost HP’s Software Group revenues by about $2 billion annually, which isn’t a bad return on investment, analysts say.

“The fact that Mercury is an 800-pound testing gorilla is a bonus. It means an immediate boost to the bottom line. It makes HP Software Group a larger percentage of total HP revenues, thereby keeping the talk that HP is not, and never will be, serious about software to a dull roar, while not upsetting partners like Oracle and BEA,” Ptak and Noel write. “It means that they will have [a] wider presence in the enterprise and a sales force that is used to selling testing software.” HP’s move was, perhaps, a godsend for Mercury Interactive. “While their IT Governance products and strategy were interesting, and unsettling to the existing competitors [such as BMC, CA, IBM, and even HP, as well as an increasing number of newly emerging players [such as EMC and Symantec] they still had trouble weaning their sales force away from easy testing money,” Ptak and Noel say. Governance is one area in which HP—with its Peregrine assets and experience—has special expertise, they note: “HP, on the other hand, is familiar with CIO issues and has been positioning itself to tackle strategic IT governance since the Peregrine acquisition. We think HP is up to it but it will take some strong sales and aggressive management to make things happen.”

If the acquisition is good tonic for HP’s Software Group, it’s equally beneficial for MI’s rattled customer-base. HP—which in past M&A scenarios (e.g., the former Compaq Computer Corp.) has been the cynosure of resentment—now must look positively white knight-ish.

The deal isn’t necessarily a bad thing for HP’s competitors, Ptak and Noel argue. “Interestingly, we don’t see much damage to the competition. HP is aggressively pursuing a ‘cradle to grave’ strategy that delivers everything from application development to end-of-life. CA and BMC have foregone any pretensions to ‘cradle to grave’ solutions,” they note. “Both, instead, are focusing on providing their clients clear and actionable paths to the realization of business service management. Both have been aggressive, and clear in their strategies to focus on the practical side of achieving the benefits of linking business operations and success to IT operations.”