Hewlett-Packard to Buy Autonomy for $10.3 Billion, Weighs PC Unit Spinoff

Hewlett-Packard Co. (HPQ) is planning a sweeping overhaul of its businesses, agreeing to buy Autonomy Corp. for $10.3 billion and weighing a breakup that would unravel the much-debated Compaq Computer Corp. purchase.

Shareholders of Autonomy, which develops search software, will receive $42.11 a share, Palo Alto, California-based Hewlett-Packard said in a statement. That's 64 percent more than Autonomy’s close yesterday. Hewlett-Packard, whose shares fell after the company issued forecasts that missed estimates, also said it’s considering spinning off its PC division and that it will discontinue products that run WebOS software.

Chief Executive Officer Leo Apotheker, who took the helm at Hewlett-Packard in November, is lessening the company’s reliance on PCs as consumer demand wanes and Apple Inc. lures buyers to its iPad. He’s also expanding in so-called cloud services, which help customers handle computing tasks over the Internet.

“Their focus is on being more of a software and services company and not dependent on the hardware businesses,” said Michael Gartenberg, an analyst at Stamford, Connecticut-based Gartner Inc. “The hardware business has become a difficult business. In many ways it’s a commodity-driven business. This is a major strategic shift for HP.”

By discontinuing WebOS products, Apotheker is backtracking on a strategy he announced just five months ago to put WebOS software on every Hewlett-Packard computer. The operating system runs the company’s TouchPad tablet and a range of smartphones.

Former CEO Carly Fiorina acquired Compaq in 2002 for $17.6 billion, making Hewlett-Packard the world’s biggest seller of PCs. Fiorina won shareholder approval for the deal after a proxy fight that pitted her against heirs of the company’s founders.

‘Anchor’ on Earnings

“This is clearly a financial decision on their part to abandon a business that wasn’t generating nearly enough margins,” said Mark Margevicius, a Gartner analyst based in Cleveland. “It’s the boat anchor that’s keeping things at bay.”

Hewlett-Packard’s results have suffered amid diminishing consumer demand for PCs. Sales in the current period will be $32.1 billion to $32.5 billion, Hewlett-Packard said in a statement today. That missed the average $34 billion estimate of analysts surveyed by Bloomberg. The company also forecast earnings that fell short of estimates.

Hewlett-Packard shares fell $1.88, or 6 percent, to $29.51 at 4 p.m. on the New York Stock Exchange. The shares have declined 30 percent this year.

Autonomy Rallies

Autonomy, based in Cambridge, England, gives Hewlett- Packard software that searches a broad range of data, including e-mails, music, video and posts on social networks such as Facebook Inc.

The company’s U.S.-traded shares rallied 45 percent to $37, their biggest gain since 2001. The shares had declined 8.3 percent to 1,429 pence in London, where markets closed before news of the takeover talks.

“For HP it’s an intriguing volte-face,” said Tim Daniels, a strategist at Olivetree Securities Ltd. in London. “Autonomy is a leader in unstructured data -- so that’s data that isn’t in the form of spreadsheets or word documents.”

Hewlett-Packard executives and directors talked about spinning off the company’s PC business as long as seven years ago, according to a person familiar with the situation. That discussion abated for several years after former CEO Mark Hurd brought in Todd Bradley to run the business, and especially after the company’s earnings improved, the person said.

Shortly before Hurd was ousted as CEO in 2010, he told some board members and executives that he wanted to discuss a possible spinoff of some of Hewlett-Packard’s hardware businesses, including the PC unit, according to the person.

Software Roots

The shift underscores Apotheker’s background in software. Before coming to Hewlett-Packard, he worked for more than two decades at German software maker SAP AG, including a stint as sole CEO in 2009 and 2010.

Autonomy, the second-largest U.K. software maker, offers programs used in database search. The company’s customers include Coca-Cola Co. (KO), Nestle SA (NESN) and the U.S. Securities and Exchange Commission.

Autonomy CEO Mike Lynch, who founded the company in 1996, owns about 8 percent of the stock, Bloomberg data shows. At 25.50 pounds a share, Lynch’s 19.8 million shares of Autonomy are worth 504.9 million pounds, or $834 million. Lynch, speaking in a June 21 interview, said U.K. software companies are cheaper than their U.S. counterparts.

Sage Group Plc is the biggest British software company in terms of revenue.

Palm, WebOS

Hewlett-Packard is abandoning the mobile software it acquired in last year’s purchase of smartphone maker Palm Inc. amid disappointing sales of the tablets that run WebOS, Apotheker said in an interview today. Fixing WebOS would have taken capital that could be better used elsewhere, he said.

The company is “looking at its options” in the smartphone market, he said.

Hewlett-Packard will record a one-time charge of about $1 billion in the fiscal fourth quarter related to discontinuing WebOS devices, the company said in a regulatory filing today.

In the past five years, there have been more than 970 takeovers of European software companies, amounting to over $31 billion in deals, according to data compiled by Bloomberg. The largest, not including the deal announced today, was SAP’s 2008 takeover of Business Objects SA.

Hewlett-Packard is paying 24 times Autonomy’s trailing earnings before interest, taxes, depreciation and amortization, compared with a median of 17 times Ebitda in 10 comparable deals, Bloomberg data show.

Barclays Plc (BARC) and Perella Weinberg Partners LP are advising Hewlett-Packard on the transaction. Qatalyst Partners is the lead financial adviser to Autonomy, which is also getting advice from Citigroup Inc., Goldman Sachs Group Inc., Bank of America Corp., UBS AG and JPMorgan Chase & Co.

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.