Computer and printer maker Hewlett-Packard said it will pay $4.5 bln to acquire Mercury Interactive, a software company enmeshed in a scandal over the backdating of stock options.
The acquisition – at $52 a share, a 33% premium over its close of $39 last Tuesday — was H.P.’s first major deal since it merged with Compaq in September 2001 and the first big deal for chief executive Mark Hurd who took over in March 2005 after Carleton Fiorina was ousted.
Mercury has software that manages hardware in the data center. The acquisition will allow Hewlett-Packard to add software that manages the software in the centers.
While analysts said the deal had strategic importance, some questioned the price Hurd was paying. “Is it a must-have company? No,” said a senior research analyst with Sanford C. Bernstein & Company. “Is it an important contribution? They must believe it because they are paying pretty significantly.”
Hanging over the deal is the investigation into Mercury’s possible involvement in the backdating of options given to some employees.
Earlier this year, Mercury restated its financial results for 2002, 2003, and 2004, reporting about $566.7 mln less income, to account for the options. The SEC said it would probably pursue civil charges against four people who were top officials at Mercury. Mercury was delisted by the Nasdaq because of issues relating to its restatement.
Amnon Landan, the chief executive; Douglas Smith, the chief financial officer; and Susan Skaer, Mercury’s general counsel, resigned in November after an internal inquiry showed that they “were each aware of and, to varying degrees, participated in the practices,’’ according to the summary of a regulatory report.
Mercury’s current chief, Anthony Zingale, took over in November. He said that he would remain with the combined companies “for the short term and medium term.”
While Hewlett-Packard has reported that revenue from its OpenView software, which manages a corporation’s servers, data storage and computer networks, has been growing about 20% year over year, the overall software unit has not been very profitable.
The Mercury acquisition could change that because it gives the combined companies more products to sell. It doubles the size of H.P.’s software business to more than $2 bln in annual revenue. The company has forecast revenue growth of 10% to 15% from the combined companies’ software operations. It also said the merger could expand operating margin in the software unit to 20% of revenue in fiscal year 2008 from H.P.’s current margins for its software unit of less than 1%. Mercury’s operating profit margins were around 20%.
Hurd said the deal did not signal a more acquisitive company. “I don’t you should expect multiple multibillion acquisitions coming from H.P.,” he said.
