Original URL: http://www.theregister.co.uk/2011/08/19/hp_autonomy_echoes_of_sun/

Hardware-happy HP has swallowed a Sun death pill

Doomed bid to get out of making actual machinery

By Gavin Clarke

Posted in Business, 19th August 2011 12:52 GMT

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.

A time to buy

This happened to the MySQL team when they were bought by Sun Microsystems in 2008, and this brings us back to the dustbin of history.

There is a model for what HP is trying to achieve and how it's going about it: Sun.

HP is like Sun: it is a tech giant with a huge hardware manufacturing footprint looking destiny in the face and trying to buy its way out of the inevitable.

HP is no Sun, it's actually making money, but HP is rattled. There's been much talk about the death of the PC and the rise of the smartphone and the tablet. This has come just as the global economy and consumer spending seems to be weakening again. Is this a coincidence or are these factors connected? Is this truly a fin de siècle?

When faced with challenging situations, Silicon Valley's answer is to buy your way out into a maintenance business or to branch into a new market. Software has allure, because companies like SAP, Oracle and Microsoft make it look easy.

Faced with stagnation in 2005, Sun made an audacious $4bn acquisition for tape-store specialist StorageTek based on bold reasoning and amid talk of synergies. The reasoning went like this: the future is data, there's a lot of data living on legacy tape drives, owning a tape business with Sun's storage and server business would mean nothing but payoff.

The deal failed to re-float Sun's failing business, and the deal was cruelly described by critics – and reported here – as the sounds of "two garbage trucks colliding". MySQL failed to turn Sun into a software company. Finally, Sun was sold to Oracle in 2010.

HP, like Sun, has a bad track record of managing integration and achieving any material market share or sales boost from the results. The obvious example is HP's Compaq buy in 2001. Integrating smaller companies is potentially easier, but keeping people who made the company special is hard as they feel excluded, ignored or stifled by the new corporate parent so they leave.

Just as when Sun when bought MySQL, HP hopes to avoid crushing its new software asset by giving Autonomy plenty of room to breathe. It will operate as a separate company under founder and CEO Mike Lynch, with Lynch reporting to Apotheker. When Sun bought MySQL, it likewise insulated its acquisition from Sun's management bureaucracy. Sun's then chief executive Jonathan Schwartz said, too, MySQL's CEO Marten Mickos would report directly to him. It's a claim Mickos has disputed; Mickos contacted The Reg to say he did not report directly to Schwartz but to then software executive vice president Rich Green who reported to Schwartz.

"Autonomy... will continue to operate separately so we can keep them focused on their own market momentum, while at the same time they can play a key role in enabling the opportunities we see and the strategy we've outlined for HP," Apotheker said.

Room for differences

This will make for interesting management. Founders and CEOs of companies bought by Silicon Valley tech giants rarely stick around; in fact they are traditionally paid to go away. Keeping them on perpetuates the acquiree's unique culture, management and business style, factors that go against the playbook in the Valley.

Looking back, HP's re-invention as software company has been in the air; HP's board has been looking for bold solutions for the future and hoping to end their reliance on the PC. Former HP CEO Carly Fiornia said the board she fell out with had talked seriously about breaking up HP into three separate divisions.

It looks as though the time for bold moves is upon HP at last, and software is the new game in town. Albeit its finances and market share are healthier, it still appears that HP may have set itself on the same road trodden by Sun. ®

This article has been updated to include comment from Marten Mickos.