HP Shows Proclivity for High Premiums With ArcSight

HP Shows Proclivity for High Premiums With ArcSight Purchase
Under interim Chief Executive Officer Cathie Lesjak, HP is paying high prices to repel threats from Cisco Systems Inc., International Business Machines Corp. and Oracle Corp. in the data-center equipment market. Source: Bite Communications via Bloomberg

Hewlett-Packard Co. outbid at least two rivals to clinch its acquisition of ArcSight Inc., two people familiar with the $1.5 billion transaction said, underscoring HP’s willingness to offer high prices for growth.

Two competitors for ArcSight, a maker of network-security software, offered no more than $1.3 billion apiece for the company, said the people, who asked not to be identified because the discussions aren’t public. The ArcSight deal, unveiled Sept. 13, follows HP’s Sept. 2 takeover of data-storage provider 3Par for $2.35 billion, after a bidding war with Dell Inc. inflated the target’s share price more than threefold.

Under interim Chief Executive Officer Cathie Lesjak, HP is paying high prices to repel threats from Cisco Systems Inc., International Business Machines Corp. and Oracle Corp. in the data-center equipment market. HP may be shedding the fiscal restraint it showed under Mark Hurd, who departed last month, said Abhey Lamba, an analyst at ISI Group.

“Paying $1.5 billion or $2 billion for an acquisition is not a lot of money for HP,” said Lamba, whose firm is based in New York. “But if they keep doing it, that could be a problem for investors.”

‘No Choice’

IBM CEO Sam Palmisano, speaking to reporters in Manhattan, took HP to task for using acquisitions, rather than spending on research and development, to pursue innovation.

“I’m never worried about a competitor that doesn’t invest in R&D,” Palmisano said. “They’ve had to buy. They have no choice.”

HP’s research and development spending fell 20 percent to $2.82 billion in the fiscal year that ended in October from $3.54 billion a year earlier.

Under Hurd, HP shunned costly deals, Lamba said. An exception came in 2007, when HP bought Opsware Inc., the software company founded by Internet pioneer Marc Andreessen, Lamba said. Andreessen now sits on HP’s board.

To win ArcSight, Palo Alto, California-based HP agreed to pay $43.50 a share, 24 percent more than the target’s closing share price Sept. 10. HP, the world’s biggest personal-computer maker, paid about 7.6 times ArcSight’s $195 million in revenue in the 12 months through July, compared with the 1.3 median of 10 comparable transactions, according to data compiled by Bloomberg.

Premium Paid

The offer also values ArcSight at 57 times the company’s Ebitda, compared with a median 11.5 times Ebitda in 10 comparable deals tracked by Bloomberg.

“Without Mr. Hurd at the helm, HP has shown much more willingness to pay a premium for high-growth acquisitions,” Jayson Noland, an analyst at Robert W. Baird, wrote in a Sept. 13 note to clients. There’s also the risk that absorbing recent acquisitions can “monopolize senior management time,” said Noland, who has an “outperform” rating on HP shares.

HP rose 33 cents to $39.62 at 4 p.m. in New York Stock Exchange composite trading. The stock has declined 14 percent since Aug. 6, when Hurd departed after a probe found he violated company standards of business conduct. As CEO since 2005, he more than tripled profit by slashing expenses and using acquisitions to push the company into smartphones, services and networking gear. On his watch, the company announced plans to eliminate at least 48,000 jobs. Oracle said Sept. 6 it hired Hurd, 53, as president.

‘Solid Track Record’

The bidding for 3Par resulted in the highest premium offered in a competitive situation among 19,063 completed and terminated U.S. deals of at least $50 million tracked by Bloomberg since 2001.

The $33-a-share bid valued 3Par at 325 times the company’s earnings before interest, taxes, depreciation and amortization during the past year. In 21 computer-services deal in the past five years, acquirers paid a median 16 times trailing Ebitda, according to Bloomberg data.

HP spokeswoman Gina Tyler declined to comment. During a conference call with investors, HP vice president of investor relations Steve Fieler said ArcSight had increased sales by about 40 percent in the past several years and he pointed to the company’s operating margin, which was 10.3 percent in its fiscal first quarter.

“HP has a solid track record of integrating and executing acquisitions as well as delivering organic growth,” Dave Donatelli, who runs HP’s storage and server division, said on an Aug. 23 conference call discussing the 3Par deal.

ArcSight Terms

While HP is getting ArcSight for a higher multiple based on sales, the 24 percent share-price premium is less than the 38 percent average premium in more than 40 acquisitions of U.S. computer-security firms in the past 10 years, according to Bloomberg data.

With borrowing costs near record lows, HP can finance pricey deals on the cheap. U.S. companies issued $42 billion of corporate bonds last week, the most since the five days ended Jan. 8 and the second-busiest week this year, according to data compiled by Bloomberg.

Investment-grade corporate bond yields fell to 3.74 percent on Aug. 24, the lowest ever, Bank of America Merrill Lynch index data show. Yields rose to 3.96 percent on Sept. 10.

Hewlett-Packard sold $800 million of two-year floating-rate securities and $1.1 billion each of three- and five-year fixed-rate debt on Sept. 8, Bloomberg data show. Proceeds may be used to repay outstanding debt and make acquisitions.

Search Firm

HP has hired the firm Spencer Stuart to help it find a permanent successor for Hurd. Lesjak, who serves as chief financial officer, has said she doesn’t want to replace Hurd permanently.

The ArcSight deal follows other purchases aimed at helping HP lessen its dependence on lower-margin computers and servers. ArcSight, a maker of software used to identify suspicious activity on a corporate network, may help HP better incorporate security features into other products.

Last month, HP acquired closely held Fortify Software, which helps information technology departments analyze software code for security holes, and closely held data-center software company Stratavia.

As HP assembles a broader array of data-center products, it needs to show that it can market them effectively, Wells Fargo analyst Jason Maynard said in a Sept. 13 note to clients.

“ArcSight marks the second in a line of two premium-priced acquisitions since the departure of Mark Hurd,” said Maynard, who has a “market perform” rating on HP. “HP has made a number of nice software acquisitions, however they still have not articulated a comprehensive strategy.”

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