On Thursday Hewlett-Packard (s HPQ) 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.