Rev That Deal Engine, HP. Autonomy Is History: Real M&A

It’s time for Hewlett-Packard Co.’s Autonomy Corp. deal hangover to end.

Three years after buying the data-analysis company, an acquisition that resulted in an $8.8 billion writedown and a flurry of shareholder lawsuits, HP Chief Executive Officer Meg Whitman says her company is once again in a position to consider takeover options. The $70 billion computer maker’s near-record cash pile gives it the means to do a deal, and the worst sales forecast among computer hardware peers provides the motivation for HP to buy its way to more competitive products.

HP investors may push for targets with stable profitability and low valuations after the Autonomy fiasco. Raymond James Financial Inc. says that could put fast-growing data management provider SimpliVity Inc. on the list. Teradata Corp. offers a big-data platform for a bargain. With the hacking of JPMorgan Chase & Co. and celebrities’ phones spotlighting the need for Internet security, data protection firm Imperva Inc. could also draw interest, said Sterne Agee Group Inc.

“Management realizes that they need to invest to drive growth but prior to now, they hadn’t earned the right to do that,” Brian Alexander, a St. Petersburg, Florida-based analyst at Raymond James, said in a phone interview. “There’s going to be a lot of scrutiny on it for sure, so whatever they buy has to definitely be high on the strategic priority list, as well as be an acquisition that they can explain from a financial return perspective.”

A representative for Palo Alto, California-based HP declined to comment.

Big Backfire

HP paid $10.3 billion in 2011 to gain Autonomy’s tools that sift through a broad range of data including e-mails and social network posts. The computer maker’s big bet on software backfired. Just one year after the deal closed, HP said it would write down about 85 percent of the purchase price after discovering accounting improprieties that inflated Autonomy’s finances.

While HP is still embroiled in lawsuits stemming from the deal, the company has rebuilt its depleted balance sheet, improved profitability, and CEO Whitman said last month that “M&A will be a part of our future.”

That’s just what HP needs, said Rich Kugele, an analyst at Needham & Co.

Revenue at HP will decline 2 percent over the next three years, compared with a median 8.4 percent increase for computer hardware and storage companies of more than $5 billion, according to analysts’ forecasts compiled by Bloomberg. HP also trades at the lowest multiple of estimated 2014 earnings in the group.

“They need to go find some other way of being relevant besides just being less bad,” Kugele said in a phone interview.

The Challenge

Finding the ideal target will be tricky because whatever HP buys has to be strategically interesting enough to add to growth yet reasonably priced enough to generate a good return, said Alexander of Raymond James. The last thing investors want is another Autonomy -- an expensive bet on a target with uncertain profitability, he said.

In an August report, Raymond James analysts led by Alexander outlined targets that may fit the bill, including closely held SimpliVity, which sells software to help companies converge their different technology components onto one platform.

“The growth areas within storage are moving more toward converged architectures, and it’s an area where quite frankly HP’s market share is a lot lower,” Alexander said by phone this month. Buying SimpliVity “would jumpstart them into what’s probably the fastest-growing part of the storage and networking markets.”

Upton Hack

Another takeover candidate that made the Raymond James list is Imperva, an $805 million cybersecurity firm. This year, hackers have targeted JPMorgan, the Apple Inc. accounts of celebrities including Kate Upton, and companies such as Home Depot Inc., suggesting no institution is safe from data breaches.

Imperva offers companies another layer of protection by helping them manage their data and identify potential weak points in their systems, Robert Breza, an analyst at Sterne Agee, said in a phone interview. “HP could definitely buy them and it would make some sense.”

Old School

Teradata, a $7 billion information-warehousing company that counts EBay Inc. and Coca-Cola Co. as customers, may also entice HP, said Todd Lowenstein of HighMark Capital Management Inc. While Teradata has more of an “old-school” approach to big-data management, it’s been expanding into next-generation technology. HP could use it as a platform to make other acquisitions and build out its own offerings, said Lowenstein, whose firm oversees about $16 billion and has owned HP shares in the past.

Plus, it’s cheap. Teradata trades at a discount to the median earnings multiple for similar-sized U.S. peers, according to data compiled by Bloomberg.

Another company that may attract HP is Tibco Software Inc. Urged by an activist investor to sell itself, Tibco has hired Goldman Sachs Group Inc. and law firm Wilson Sonsini Goodrich & Rosati to help it review its strategic options. The $3.6 billion maker of software used by businesses to process and analyze data has begun pitching its business to private-equity firms including Bain Capital LLC and KKR & Co., according to people with knowledge of the matter, who asked not to be identified discussing private information.

Little Nibble

“Maybe you get a little bit of a nibble there” from HP as well, Peter Wahlstrom, a Chicago-based analyst at Morningstar Inc., said in a phone interview.

Shares of Tibco slipped 0.1 percent to $21.76 at 9:48 a.m. New York time. Teradata dropped 0.1 percent to $44.83, while Imperva climbed 0.1 percent to $30.39. HP declined 0.8 percent to $37.

Representatives for SimpliVity, Palo Alto, California-based Tibco and Dayton, Ohio-based Teradata declined to comment. A representative for Redwood Shores, California-based Imperva didn’t respond to requests for comment.

Small Expectations

Investors may prefer that HP make several small acquisitions, rather than one large one, given the middling performance of its big takeovers such as Autonomy, Electronic Data Systems Corp. and Palm Inc. Ideally any purchases would cost closer to $1 billion than $5 billion, according to Jayson Noland, a San Francisco-based analyst with Robert W. Baird & Co.

“We see some caution when it comes to these large and semi-transformative deals,” Noland said in a phone interview. “Some of their larger, more high-profile acquisitions haven’t panned out.”

Even so, HP needs to bolster its growth prospects and make itself more competitive and that’s going to mean acquisitions, said Lowenstein of HighMark.

“You’ve got to skate to where the puck is,” he said. “Longer term they need to be in the areas where the growth is and right now, they’re behind the curve on cloud, on mobile and on big data. They have the opportunity to play catch-up and could do it in a measured way.”