James Governor's Monkchips


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HP ran an analyst conference call today to explain how its M&A processes work. This is an important issue because HP’s choices define not just HP itself, but the future shape of the industry.

A couple of things jumped out at me during the call.

1. Investment banks are evidently seen as an important part of HP’s M&A planning and execution; they are perceived as a constituency that matters. This evidently contrasts fairly strongly with IBM’s current approach to acquiring functionality through acquisition; that is–IBM Software Group usually buys small closely held software vendors to fill out its own portfolio. No bankers involved. the last big deal was Rational and we don’t expect to see many more of those for a while. Even Candle, a mid size software company, was a private concern. No investment banks involved. No terms disclosed.

2. Another point that struck home was the discussion around integration issues; whether soft or hard. How to integrate one company with another. There is a major difference in approach between HP and its nemesis. IBM, unlike HP, encourages ISVs to build to its platforms–DB2 or WebSphere say, and then acquires them subsequently. Green Pastures is a good example. IBM can “Bluewash” a firm in very short order–releasing new products that run on its middleware within days. HP though has no equivalent middleware infrastructure to support, that will also serve to constrain its investment decisions. HP supports Java and .NET and a host of operating environments, wchich has to make integration and due diligence harder. Interestingly, Sun’s Jonathan Schwartz made some related points recently–what platform does HP recommend ISVs write to? I might add–if they want to be acquired... Without a story there, its harder to build an ecosystem.

From a services perspective HP is making targeted local acquisitions in European geographies–firms such as Triaton and Synstar. It is being aggressive, but there are plenty of other firms in Europe on the services acquisition trail – notably CSC and SAP–which will tend to drive prices up. Having said that–HP’s European services business is a good beachhead for the firm–Compaq’s old multi-vendor customer services organization is still a good base to build on. HP has made some potentially very smart deals in the service management training space. Already a long term exponent of the IT Infrastructure Library, a descriptive best practices framework for delivering IT and as a service, HP has been acquiring ITIL training and services companies such as ManageOne and CEC Europe, setting itself up as an educator and trusted advisor. ITIL is finally driving into the mainstream worldwide–user organizations are increasingly mandating ITIL skills and vendors are responding with gusto – the Microsoft Operational Framework is designed to map to ITIL, and vendors such as BMC Remedy, FrontRange, NetIQ, Quest are all pushing ITIL too. HP’s education first approach could well pay dividends given that ITIL is very poorly understood, and many software vendors are overselling it, or misrepresenting their capabilities.

What next for HP in terms of M&A? It plans to buy in the security space (as the call leader mentioned, the phone is ringing off the hook from investment bankers). Mobility and digital content management are other areas we’re likely to see some deals. HP could do worse than acquire Elata for content mobility. There are a lot of other suggestions I could make but then I am not an investment banker.

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