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Hardware-happy HP has swallowed a Sun death pill

Doomed bid to get out of making actual machinery

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Analysis Leo Apotheker has joined a long line of Silicon Valley CEOs who have struggled to stop their hardware-centric tech companies slipping into the dustbin of history.

Hewlett-Packard's chief executive has unveiled an audacious plan to turn his company from the planet's single biggest maker of PCs into, er, a software company.

To achieve this, Apotheker will buy the relatively small enterprise search specialist Autonomy, software poster child of Britain's tech biz, while looking to sell HP's PC business at the height of its success.

As a step towards exiting PCs Apotheker is killing the unwanted TouchPad, HP's titular challenger to Steve Jobs' uberselling iPad tablet, and HP's webOS phones. Ironically, that signals the death of webOS, the operating system bought amid a flurry of talk for $1.2bn last year.

Apotheker is staking everything on his background as a software guy, having spent 20 years at SAP where he served briefly as CEO before being turfed out by the board. SAP is the world's largest maker of business software, despite a red-blooded challenge from Larry Ellison and Oracle. According to Apotheker, the world of software is a world he knows well.

Software is certainly the place to be if you want to make more money on the product you're selling. Hardware is made expensive by the raw manufacturing and shipping processes involved.

But if Apotheker knows software then he should also know that the real money is being made in the kinds of software his old company makes and that its biggest rival Oracle sells – business apps, like CRM and ERP.

These are considered indispensable by companies because they run so much of their operations – manufacturing, logistics, payroll, sales, customer relationships and so on. Without them, companies would grind to a halt so financial officers and chief information officers willingly pay for them.

And what's really nice is that once the ERP or CRM maker is in the door, the customer is hooked. Because this software runs the business, the CFO or CIO won't rip and replace, meaning they require ongoing maintenance and support. ERP and CRM become a licence to print money for the software company.

Oracle made more money on licence updates and product support for last year than on selling brand-new licences for its software.

In HP's re-invention as a software company, Apotheker has gone for a sector – search – that's got plenty of buzz thanks to Google but which is complex to sell. He's also buying a company, Autonomy, which won't make the task any easier. Also, he's a newbie going up against a company with plenty of experience in enterprise search, IBM.

Apotheker was quick to point up Autonomy's numbers during his call with Wall Street on Thursday as proof that the buy will be good for HP's growth. Autonomy has gross margins in the high 80-per-cent range and operating margins above 40 per cent with a "strong, consistent track record" of double-digit revenue growth. In February, Autonomy announced annual revenue of $870m, up 18 per cent compared to 2009.

Them's some juicy numbers to a PC maker where it's hard to get a return on your product and where you just lowered your fourth-quarter guidance because you don't think people will spend as much as you'd hoped.

But Autonomy is no PC business swap-in. HP makes and sells nearly 20 per cent of the world's PCs, a long way ahead of number-two Acer. HP on Thursday announced total quarterly revenue of $31.2bn with its PC business puling in $9.59bn. Autonomy made $256m in its most recent quarter.

So, Apotheker spoke of "synergies" while announcing the Autonomy buy Thursday.

"We believe this transaction will unlock synergies within Autonomy and the HP enterprise offerings, including ESSN, software, services and IPG and across multiple industry verticals," he said.

If Apotheker wishes to turn HP from the world's number-one maker of PCs into the biggest enterprise search and information company, as he is signalling he does, he'll need some quick and straightforward success.

Money maker

But enterprise search is no licence to print easy money, unlike ERP or CRM. It's a complex consulting-based sell that is based on understanding what the customer is really trying to achieve. It's not like pitching PCs. And while Autonomy has been successful in racking up big customers, this hasn't come easily or cheaply for the company. To help get there, Autonomy's spent more than $2bn buying the customers and the technologies of four companies plus the assets of a fifth (CA Technologies) in the last six years.

Autonomy sells a vision of unified search across different types of data and data silos, but the real work comes from stitching together the different products it has bought together with Autonomy's existing software to make them meet customers' needs. Buying customers with those five purchases has also meant Autonomy has already got a foot in the door on major accounts.

Some might say that being part of HP gives Autonomy the benefits of the scale of working through HP's sales people and its channel, but the truth is HP's people will know next to nothing about Autonomy or enterprise search. What lies ahead will be a fire drill of endless internal HP and external customer meetings for the small Autonomy team, to explain what it is they do and to try and sell the combination of HP and Autonomy.

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