HP's $11.7 billion acquisition of Autonomy is a bold and strategic step, but it will be increasingly difficult to make the transition from hardware to software and services going forward, say analysts.
The technology company yesterday confirmed it was in discussion with infrastructure software company Autonomy regarding a possible business combination, and last night announced it will make the acquisition. The offer dictates that HP will acquire all of the outstanding shares of Autonomy for £25.50 ($42.11) per share in cash.
“The transaction was unanimously approved by the boards of directors of both HP and Autonomy. The Autonomy board of directors also has unanimously recommended its shareholders accept the offer,” says HP.
Underscoring the problems plaguing what was once its core business, the iconic Silicon Valley company also plans to kill WebOS-based phones and the TouchPad tablet, which was launched in June but has failed to excite consumers. It will continue to explore options to optimise the value of webOS software going forward.
The industry feel is that, like other PC makers, HP is struggling to compete with Apple's iPhones and iPads, which are grabbing up PC market share.
Big data
Steven Ambrose, MD of Strategy Worx, says HP is trying to transition from a hardware company, an industry that is increasingly becoming commoditised, to a software and services firm.
“The transition is a similar one that IBM went through many years ago. Autonomy is a company that specialises in data analysis and is reportedly many years ahead of the field in this regard. Big data, as it is being called, is the next frontier in business intelligence and it appears that HP wants to tackle this market in a big way.”
However, Ambrose says conditions for big technology companies are very different from the days of IBM's transition from hardware to software and services.
“There is far greater fragmentation on the innovation side, and far greater consolidation on the production and distribution level. HP will find it increasingly difficult to make this transition going forward. However, the acquisition of Autonomy is a bold and strategic step in this direction.”
Scrapping tablets
Clinton Jacobs, IT sector business manager at BMI-TechKnowledge, says it is obvious HP is under pressure since it's been “hugely disappointed” with its tablet sales.
“Chances are they've realised they're up against huge competition with Android and iOS. They've conceded defeat in the tablet market. They realised they were too late out of the gates. It put a lot of pressure on the PSG [Personal Systems Group].”
Chris Gilmour, analyst at Absa Investments, says scrapping the tablet was a good move for HP. “For them to realise they can't compete in the market is good news. They've obviously wasted a lot of money, but at least they won't be wasting anymore.”
Jacobs adds that the acquisition may be a move to further provide end-to-end solutions. “The big point is that HP is betting bigger on enterprise and corporate income than on consumer income, in what seems like tough times.”
Local impact
Ambrose says the local market will respond in the same way as international markets and the actual effect of this acquisition will take a number of years to filter through.
“Emerging markets, including SA, are not as heavily computerised as the developed world and, apart from certain industries, such financial services for big data and its analysis will take a few more years to develop.”
Jacobs says local notebook retailers and the local arm of PSG may not be too comfortable as a result of the acquisition.
Vision acceleration
“The transaction will be implemented by way of a takeover offer extended to all shareholders of Autonomy. The acquisition of Autonomy is expected to be completed by the end of calendar 2011,” says HP.
Autonomy's software powers a full spectrum of mission-critical enterprise applications, including pan-enterprise search, customer interaction solutions, information governance, and end-to-end eDiscovery, adds the company.
It says over the last five years, Autonomy has grown its revenue at a compound annual growth rate of approximately 55% and adjusted operating profit at a rate of approximately 83%.
“Autonomy presents an opportunity to accelerate our strategic vision to decisively and profitably lead a large and growing space,” said L'eo Apotheker, HP president and CEO.
“Together with Autonomy, we plan to reinvent how both unstructured and structured data is processed, analysed, optimised, automated and protected. Autonomy has an attractive business model, including a strong cloud-based solution set, which is aligned with HP's efforts to improve our portfolio mix.”
Apotheker says HP believes this move will squarely position it in software and information to create the next-generation 'Information Platform'.
Portfolio complement
The company says the acquisition positions it as a leader in a large and growing space.
“Autonomy has a strong position in the $20 billion enterprise information management space, which is growing at 8% annually. Furthermore, key Autonomy assets would provide HP with the ability to reinvent the $55 billion business analytics software and services space, which is growing at 8% annually.”
It adds that Autonomy complements its existing technology portfolio and enterprise strategy, since Autonomy offers solutions that are synergistic across HP's enterprise offerings and strengthens capabilities for data analytics, the cloud, industry capabilities and workflow management.
“Autonomy has a consistent track record of double-digit revenue growth, with 87% gross margins and 43% operating margins in calendar year 2010.”
HP also expects the acquisition to be accretive to non-GAAP earnings per share for HP shareholders in the first full year following completion.
The company estimates full-year FY11 revenue will be approximately $127.2 billion to $127.6 billion, down from its previous estimate of $129 billion to $130 billion.
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