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HP drives Mercury Interactive into garage for $4.5bn

Biggest buy since Compaq

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Hewlett Packard has bought into the application performance and IT governance trend by acquiring Mercury Interactive in HP's biggest deal since the Compaq purchase.

HP is splashing out $4.5bn, or $52 per share, working out at a handsome 33 per cent premium over the current price for a company that set the tone for software companies helping customers trying to "align business and IT."

We haven't seen that kind of premium since the go-go days of 2000 and 2001. There is, of course, a catch: Mercury must file its annual report for fiscal year 2005, still outstanding thanks to the fallout associated with its share allocation scandal. If all goes well, the deal is set to close in the fourth quarter of calendar 2006.

Mark Hurd, HP's straight-laced chief executive, said the price makes perfect sense and the valuation is "in the normal range for a property of this strength."

Hurd believes Mercury will help HP's software business deliver between 10 and 15 percent revenue growth in fiscal 2008. Mercury recorded preliminary revenue growth between 22 per cent and 24 per cent for its as yet unofficial fiscal year 2005. The company's strength has been in tuning applications like SAP and Oracle.

"(They) had a software business that was a perfect complement to our software business," Hurd said. "We can build ERP-like capability for the management software market.

"We've been thinking about this for a while. It has to be a deal that makes sense. This transaction demonstrates HP is building a software business that is to be reckoned with."

While denying HP was warming up for any further, multi-billion-dollar-style acquisitions, Hurd also denied this was in any sense an opportunistic purchase that capitalized on the misfortunes of another. Realistically, though, it was only a matter of time before someone swooped in to pick up the once squeaky clean Mercury.

Top executives, including Mercury's then chief executive and chief financial officer, stepped down last year following an investigation into illegal allocation of the company's shares. Mercury's was also delisted from Nasdaq as it re-stated years' worth of earnings.

Quite an irony for a once high-flying company selling software designed to help others with their regulatory compliance and which, in 2004, set out its goal to become one of the industry's five largest software companies. For Mercury, which had some 2,300 employees, that meant rubbing shoulders with Microsoft, Oracle, SAP and CA.

HP's deal certainly beefs up the company's stature in a field where Mercury is strong. The buy aids HP in performance optimization, regulatory compliance and service oriented architectures, helping it compete with IBM which claims to also help customers through a flowery combination of its WebSphere, Rational, Tivoli and DB2 software. HP should be expected to channel reporting from Mercury's software into its mighty OpenView systems management framework.

It also throws a massive pebble into the water for smaller companies trying to milk this market. Among them, Borland Software in the process of shedding its 20-year IDE business to focus on its own "software delivery optimization" strategy.

In an internal email to HP employees obtained by The Register, executive vice president of HP's technology solutions group, Ann Livermore called OpenView the "secret sauce" in the alignment of business and IT, saying it would help IT teams to automate the kinds of changes necessitated through new business demands.

"With this move, we are redefining IT management by integrating the many building blocks into a complete solution for the entire IT lifecycle," Livermore said.

"The acquisition increases the size of HP’s software business to more than $2bn in annual revenue, making HP one of the largest software companies in the world. I am very excited about this opportunity and look forward to its positive impact upon our business."®

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