HP acquiring Autonomy - is this HP's IBM moment?

Is HP on the brink of its IBM moment? Does the Autonomy acquisition add genuine long term value or is it little more than an ill conceived attempt at putting a finger in an otherwise overflowing dyke?
Written by Dennis Howlett, Contributor on

Those of us with long memories will recall when IBM was within spitting distance of being broken up. It was in a shocking state. As I listened on on today's HP earning call, I could not help but have IBM flashbacks.

Today's HP earnings call was brutal by any standards. Leo Apotheker, HP CEO took the first 20 minutes doling out ladles full of bad news:

  • TouchPad - dead. Our own Jason Perlow took some flak when he predicted that back in June. His post has proven to be prescient.
  • Personal Systems Group - on life support. Yeah - and IBM saw that nearly 10 years ago.
  • The otherwise 'liquid gold' printer business - in trouble following the tsunami in Japan. What did HP not know that Apple seemed to have no problems overcoming? Aaah yes - Made in China.
  • Oracle's action on Itanium crimping the company's ability to close deals. Anyone surprised? Oracle's leaders must be thinking they've got HP just where they want them - by the short hairs.
  • Macro-economic problems and weakening demand in public sector impacting business. Interesting - UNIT4 doesn't seem to be experiencing the same problems.

And then to cap it all, HP announced it is buying Autonomy for a price equivalent to 11x revenue. This is a price that stunned many observers. Autonomy is a niche business that may, in the short term, help revive the ailing EDS services business. But what if it doesn't?

Back channel armchair punditry ranged from those who are flat out shocked to those who come up with what they perceive as better options like Citrix or BMC. John Appleby, colleague and fellow SAP Mentor lashed out saying:

...as to the Autonomy acquisition, it just looks bizarre at first glance. It’s a standalone software company that does niche database search products and sells to some big customers. Great, it will diversify HP’s software business but I don’t see the attraction of such a niche?

It doesn't get much worse than this.

Either I’m missing something and it is an Apotheker stroke of genius, or HP made a bad call employing him. Let’s sit on the sideline and see how it plays out in 6 months from now. Because HP has already lost 25% of its stock value in 2011 and if this is another bad business decision, HP will pay dearly.

Appleby's in a good position to assess this as he represents one of the UK's largest SAP SIs and knows what it is like dealing with HP from the inside. From what I have seen recently, it isn't pretty.

What was more worrying to me is the fact on the earnings call, Apotheker would not be drawn on projections for organic growth arising out of this mega acquisition. Instead he said (per the HP transcript)

I cannot comment on that specific thing. What you should consider when you analyze the numbers of autonomy is that over the last few years they have been executing a very successful shift [in] software service, delivering their software through the cloud which is a totally different model and have done a splendid job doing so as one of the few traditional license companies that have executed such a successful transition.

Why can't Apotheker talk to those numbers? Part of the reason seems to be because the HP business model is so complex that attempting to come up with a value based statement would be too difficult and dangerous. Instead, HP seems to have taken this earnings call as an opportunity to let the market know just how bad things are in the expectation that things can only get better - subject to the usual caveats about the macro economy.

But that still leaves question marks around Autonomy itself.  While Appleby is right in saying the company is in a narrowly defined niche, it has carved out a solid reputation in enterprise search where it handles both structured and unstructured data. During its life, Autonomy acquired - among other things - Interwoven which in turn gave it a strong lead into enterprise content management.  HP on the other hand acquired Vertica in February, 2011. Vertica plays in the so-called Big Data space.

Both of these activities have strong service components. It may be that Apotheker sees the combination of software/services and HP's existing presence in enterprise storage plus the remnants of EDS as sufficiently complementary that the combined machine will deliver stronger and more profitable growth while at the same time reviving the EDS brand. And heck - Big Data is one of the hot enterprise topics du jour so why not see if HP can make a good go of that market?

Intruigingly, Apotheker said the plan is to leave Autonomy to operate as an independent unit so quite how HP will pull off this type of multi-headed sales pitch is something of a mystery given how awkward it can be attempting to heft multiple contracts in enterprise deals.

Unless...what we are really seeing is Apotheker's attempt at building a roped off software and services unit that can flourish independently of all the other hardware parts. If that is the case, and he pulls it off, then history may yet reward Apotheker as the man who pulled HP out of the IBMesque abysss.

Meanwhile, analysts will need to see how this hashes out in the coming months. Given HP's recent woes and the uncertainty surrounding a deal of this kind, transparency into the software and services business will be welcome. To that extent, I give Apotheker kudos for having the balls to cement a deal which to many seems nutty at a firm where the ship ain't just leaking for lack of sales.

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