New Hewlett-Packard CEO Leo Apotheker said software is "the glue" that will hold the company together and allow it to leverage into valued added services. The big question is whether HP will have enough options to make that software-as-glue vision reality.
Indeed, software accounts for only 3 percent of HP's revenue pie. Here's what Apotheker said the day after being named HP's leader:
I believe, and the management team believes, and we all believe, that HP should be more valuable than the sum of its parts. And in order to make that happen, we all believe, and HP has a long-standing commitment to that, that software is sort of the glue to make that happen. Software is how we differentiate on our industry-standard platform. Software is how we can make sure that the various parts of our technology actually fit well together.
It's not only software though. Also higher value-added services are increasingly an important element and an important component in the strategy as well. So you should see us working on all of these elements.
Given HP's software standing---actually lack of it---it's easy to make the leap that the company is going to buy its way into the enterprise applications market. HP has some key software pieces with Mercury, Opsware and a bevy of automation tools for the data center, but that's not where the enterprise game is. HP has a software band that lacks a lead guitarist or singer. Where's the business intelligence portfolio? How about the analytics? Data warehousing?
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To wit: HP's software revenue is the same size as its financing arm.
Meanwhile, HP doesn't have a lot of acquisition targets in software. Why? IBM and Oracle have acquired most of them. IBM adds to its software portfolio almost weekly with smaller deals in between larger ones like the Cognos purchase. Oracle goes for bigger bang deals---Siebel, PeopleSoft, Hyperion and dozens of others.
Cowen & Co. analyst Peter Goldmacher sums up HP's software challenge. It's fine that Chairman Ray Lane and Apotheker are software experts, but there are only so many cards to play.
The enterprise software landscape is dominated by Oracle and IBM, and to a lesser degree, SAP, and to an even lesser degree, Microsoft. The vast majority of needle-moving enterprise software M&A has been executed by IBM and Oracle, leaving very few opportunities for HP to acquire its way into the space in a meaningful way. While there are a few possible large software deals left (SAS, Teradata, Computer Associates, BMC, Adobe, Symantec, Citrix and a couple of potential mergers (SAP, MSFT), the dearth of meaningful software M&A opportunities should prohibit HP from doing any meaningful deals near term, and therefore won't threaten Oracle and IBM for the foreseeable future.
I'm not sure HP will be all that prohibited. Perhaps HP would gobble up Teradata---arguably the hottest girl at the enterprise M&A ball---to get into analytics appliances and then go for CA, which would provide a solid maintenance revenue stream. Those two deals would move the revenue needle. SAP is an option and Citrix would be an extremely interesting purchase. The big point: HP is going to have to buy its way into the software game. HP could gobble up every on-demand software provider and still not move the revenue needle.
If Apotheker figures out the software equation for HP he'll be worth the $1.2 million salary, $4 million signing bonus, $4.6 million relocation benefit and various stock and cash incentives and then some.