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Summary:

Hewlett-Packard plans to spend some $10.25 billion to acquire Autonomy, the United Kingdom–based software and services company. HP’s balance sheet currently has $13 billion in cash. Why is the company making such a big bet? According to HP’s CEO, Leo Apotheker, it’s now or never.

HP CEO Leo Apotheker

HP CEO Leo Apotheker

On Thursday Hewlett-Packard announced plans to spend some $10.25 billion in cash to acquire Autonomy, the United Kingdom–based software and services company.

Given that HP’s cash reserves currently total $12.9 billion, the deal represents a major monetary outlay that will leave the company’s wallet significantly lighter than it has been for many years. Why is HP is taking such a huge leap?

In a Q&A session with investors and analysts on Thursday, HP’s CEO, Leo Apotheker, acknowledged that the Autonomy bid is bold, but he insisted that it will pay off in the end. Here are his main reasons why:

  • It’s now-or-never time for HP. Apotheker recognized that people may question why HP is making such a big bet, but according to him, drastic times call for drastic measures.

    This is about a transformation to position HP for the future. These changes are fundamental for the future we all want. HP is at a critical point in its existence.

  • Businesses today deal with a ton of data, so Autonomy’s software to help manage that data will be in demand for years to come. None of HP’s current businesses have that kind of growth potential.

    Autonomy represents an opportunity for HP to accelerate our vision to . . . lead a large and growing space, which is enterprise information management. If we execute this deal it will position HP as a large and growing leader in the space.

  • Margin-wise, Autonomy can hit the ground running at HP. Apotheker pointed out that Autonomy has grown its revenue at a compound annual growth rate of 55 percent, and with an operating profit of 83 percent over the past five years.

    We’re buying a very strong business and we believe we can extract a lot more out of this business by combining it with HP. That was the justification for the price.

  • Apotheker has a soft spot for software. Apotheker joined HP as CEO nine months ago, after spending more than 20 years in various roles at SAP, the German software corporation. In the earnings call, Apotheker noted that buying Autonomy puts him in a comfortable space.

    As an executive who has spent most of my career primarily in software, this is a world I know very well.

On the earnings call, several people pressed Apotheker on Autonomy’s price tag — “You are paying a fantastic price,” Sanford Bernstein analyst Toni Sacconaghi said — but they seemed to agree that moving toward a higher-growth market such as enterprise software is a smart move for HP. Whether those benefits will be worth the big cost will only be seen in time.

  1. Go to solutions tab on http://www.autonomy.com and see these silly groupings of power, protect, promote, and healthcare.

    Of these 4 the only one where Autonomy has a very strong position ( mainly due to acquisitions ) is Protect i.e. eDiscovery, Compliance, Content Management, Legal Market, Records Management, Content Archiving.

    Power and Promote are weak to average ( very competitive and more cost effective solutions by established players and savvy startups ) and meaning based healthcare looks ?

    So this is enough for HP to justify a $10.2 Billion deal ;)

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    1. Because the value of Autonomy rests on your opinion..

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      1. Joshua Goldbard Friday, August 19, 2011

        Or because the value of Autonomy rests on everyone’s opinion.

        This is one of those deals whose outcome we will only be able to articulate in hindsight.

        I am bullish on this as virtualization was going to cannibalize most of HP’s manufacturing business over time.

        Check out more here on my blog :)
        http://wp.me/p1tMGh-66

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  2. Hey I used to be an analyst for Giga which was purchased by Forrester so its interesting to see a group using Giga in its name again. Looks like no relation though. As far as the HP – Autonomy deal, I think HP is looking at it as more than just acquiring Autonomy accounts and income (because there’s no way HP will run Autonomy as cost effectively as Autonomy does) but rather also looking at the technology, patents, IP and people that Autonomy brings to the table. HP doesn’t have anything like it and if HP didn’t buy it chances are they’d never be able to get into some of these markets or develop similar technology in time to be relevant. Yes it is a gamble and the future is never as rosy as painted when mergers or acquisitions are announced, but I understand why HP is doing what its doing and if they pull it off they’ll cement a positive revenue stream and technologies that will lead to more revenue in the future.

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  3. Just saw S&P Places Hewlett-Packard Co. on Creditwatch Negative

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  4. Given HP’s track record of failed acquisitions, I don’t have much hope for this one.

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    1. Except Compaq.. still i consider it was a great acquisition, but HP as it is with its EGO will never get anything out of the acquisition.. just dismantle and throw it away piece by piece..

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    2. Except for Compaq.. that was a great acquisition, but HP will not fruition merger.. the EGO is too much and the upper management is just bologna, it is run like Indian Govt.. no structure, no accountability, just phenomenal BS. HP will do the same thing to all the acquisitions, dismantle it piece by piece and making it worthless..

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  5. Gregory Wexler Friday, August 19, 2011

    Interesting – a company that has been largely software/service based (Google) is acquiring a company that’s more hardware/device based (Motorola). AND – a company that’s been more hardware/device based (HP) is acquiring a company that’s more software based (Autonomy).

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    1. Colleen Taylor Friday, August 19, 2011

      And both deals are worth $10B+. It’s certainly been an interesting week. Thanks for the comment!

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      1. Anthony P. Vitale Friday, August 19, 2011

        and I believe about to get stranger, What would you say if I told you that Microsoft was going to buy HP’s PC business

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    2. I guess they should exchange their buys:-)

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  6. This is a wrong move by HP for sure. In 2001 the same thing was done when they bought Compaq. Now 10 years later they are doing the same mistake by getting Autonomy. Very sad.

    HP Bought Baltimore technologies for Identity Management but they are using CA SiteMinder Internally and externally.

    They are using Oracle Weblogic. I hope they use Autonomy internally.

    Well i won’t be surprised if they Stock hits $14.00 for sure.

    Tks, Nag

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  7. Mike Campbell Friday, August 19, 2011

    HUGE mistake by HP. They’re grabbing at straws… the next big move they make may be that they are being acquired by Dell.

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  8. Rajesh Agarwal Friday, August 19, 2011

    Facts and figures dont seem to be in synch. 1% of incremental revenue to shell out 20% of current market cap just does not make sense… Autonomy is no iPAD like monopoly growing ridiculously to justify a 10x revenue kind of valuation….

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  9. They should just acquire Groupon and call it a day…

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  10. HP Grow UP, Already http://t.co/C5Ype5M #HP stock sold off b/c Wall St tired of overpriced “must-have” acquisitions

    Agree & little upside here

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  11. Look behind the curtains HP, AU is all smoke and mirrors and a hugely dysfunctional company

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  12. I remember when HP said “WE HAVE TO BUY PALM” WEBOS is great and it will allow us to gain entry into the fast growing market for tablets and smartphones, which are the FUTURE and destroying the traditional PC business.

    I think Autonomy is a great business and I like the direction where HP is trying to go in terms of pursuing higher margins via services as opposed to hardware. But given HP’s dismal track record regarding M&A, I honestly don’t believe they’ll be able to accomplish what they want or need to from Autonomy especially at the price they’re paying.

    But who knows, we’ll see how things play out.

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  13. Coming back to the future for a minute – HP’s decision to buy Autonomy validates the growth that we are seeing across the enterprise information management space, emphasising the importance of search and Document Filter technology. We have found that the most important issue in our industry is being customer responsive and developing technology roadmaps hand in hand with our customers. We have just last month released our Document Filters 10.0 which is the only software of its type that supports MAC OSx, a specific requirement of one of our key customers, MarkLogic. Product development could also stagnate further with the acquisition – it has already been five years since IDOL’s last major release.

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