Is HP going shopping?
Hewlett-Packard is said to be interested in buying software and services
June 23, 2003: 1:49 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer
NEW YORK (CNN/Money) - A little more than a year since Hewlett-Packard
completed its purchase of Compaq, the company may be gearing up for more
Such rumors have been circulating since CEO Carly Fiorina said at an
analysts meeting earlier this month that services and software are two
areas where the company might look to acquire companies. HP was not
available for further comment for this story.
Wall Street has warmed to HP (HPQ) in recent months as the company
continues to narrow losses in its enterprise division -- which sells
storage and servers -- and makes improvements in its personal computer
segment, which competes aggressively with Dell Computer.
Still, further moves to diversify away from these two notoriously tough
businesses would probably be welcomed. "Anything HP can do to move away
from the eroding margin business of hardware would make sense," said Adam
Adelman, senior technology analyst with Philippe Asset Management, a New
York-based asset management firm. He does not have a position in HP.
A "bear" of a deal?
Fiorina already has tried to make a big move into services, when it offered
to buy the consulting business of PricewaterhouseCoopers in 2000. The two
companies could not agree on a price. IBM wound up scooping up PwC's
consulting division last year.
HP increased its presence in the services business through the Compaq deal
but it still has a long way to go to catch IBM, said John Rutledge, manager
of the Evergreen Technology fund, which owns shares of HP and IBM.
The services business is attractive because of its relative stability --
big companies typically sign multi-year outsourcing contracts, such as HP's
recent $3 billion, 10-year deal to run Procter & Gamble's IT services --
and it could also give HP the opportunity to sell more of its computers,
servers and printers.
"HP would benefit from a services acquisition. It's a great entre for
additional business," Rutledge said.
But Rutledge said he doubts that HP would want to do a truly large deal so
soon after the Compaq merger. So that probably would rule out companies
like the struggling EDS, which has an $11 billion market value, as well as
other major players in tech services, including Affiliated Computer
Services ($6.4 billion market cap), Computer Sciences ($7.8 billion) and
Accenture ($16.8 billion market value).
Still, Rutledge said that BearingPoint (BE), formerly known as KPMG
Consulting, could be an interesting takeover candidate since its market
value is less than $2 billion. A spokesman for BearingPoint would not
Searching for software
On the software side, don't expect HP to get involved in the
PeopleSoft-Oracle fracas, even though PeopleSoft disclosed in a regulatory
filing Friday that it would consider a so-called "white knight" bid.
Robert Cihra, an analyst with Fulcrum Global Partners, said HP would be
unlikely to buy a major application software company like PeopleSoft, which
sells products that help companies manage their customers, supplier and
human resource functions. He doesn't own the stock and Fulcrum does not
perform investment banking.
But Cihra said a storage software company or infrastructure software
company would be a good fit with HP's enterprise business division.
Storage software developer Legato Systems (LGTO) could be a fairly easy
deal for HP to do, according to Michael Mahoney, managing director of EGM
Capital, which runs a hedge fund focusing on technology, telecom and media
companies. Legato would not comment.
Mahoney pointed out that HP already is Legato's largest reseller of
software so the companies are fairly familiar with each other. Plus,
Legato's market value is only $887 million. Legato was the subject of
takeover rumors earlier this year. EMC, a competitor of HP in the storage
business, was the mentioned suitor.
BEA Systems, which develops infrastructure software that helps companies
manage e-commerce capabilities, has been mentioned as a possible target for
HP as well. Rutledge said BEA (BEAS), which competes against IBM's software
division, could be a target since it has struggled as of late. The company
reported in May that its first quarter licensing revenue fell from a year
And despite the big tech rally, shares of BEA are down 4.5 percent year to
date. Still, BEA would be a bigger deal for HP to digest, with a market
value of nearly $4.5 billion. BEA did not return a call for comment.
HP's stock has surged 42 percent since March 11, which could make its
shares more attractive to takeover targets. Plus, the company had $13.7
billion in cash on its balance sheet as of April 30. So even though HP may
not be itching to a deal just yet, it clearly has the financial strength to
pull something off.
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