News > Technology
Is HP going shopping?
Hewlett-Packard is said to be interested in buying software and services companies.
June 23, 2003: 4:39 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - A little more than a year since Hewlett-Packard completed its purchase of Compaq, the company may be gearing up for more deals.

Such rumors have been circulating since CEO Carly Fiorina said at an analysts meeting earlier this month that services and software are two areas where the company might look to acquire companies. HP was not available for further comment for this story.

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Wall Street has warmed to HP (HPQ: Research, Estimates) in recent months as the company continues to narrow losses in its enterprise division -- which sells storage and servers -- and makes improvements in its personal computer segment, which competes aggressively with Dell Computer.

Still, further moves to diversify away from these two notoriously tough businesses would probably be welcomed. "Anything HP can do to move away from the eroding margin business of hardware would make sense," said Adam Adelman, senior technology analyst with Philippe Asset Management, a New York-based asset management firm. He does not have a position in HP.

A "bear" of a deal?

Fiorina already has tried to make a big move into services, when it offered to buy the consulting business of PricewaterhouseCoopers in 2000. The two companies could not agree on a price. IBM wound up scooping up PwC's consulting division last year.

HP increased its presence in the services business through the Compaq deal but it still has a long way to go to catch IBM, said John Rutledge, manager of the Evergreen Technology fund, which owns shares of HP and IBM.

The services business is attractive because of its relative stability -- big companies typically sign multi-year outsourcing contracts, such as HP's recent $3 billion, 10-year deal to run Procter & Gamble's IT services -- and it could also give HP the opportunity to sell more of its computers, servers and printers.

"HP would benefit from a services acquisition. It's a great entre for additional business," Rutledge said.

But Rutledge said he doubts that HP would want to do a truly large deal so soon after the Compaq merger. So that probably would rule out companies like the struggling EDS, which has an $11 billion market value, as well as other major players in tech services, including Affiliated Computer Services ($6.4 billion market cap), Computer Sciences ($7.8 billion) and Accenture ($16.8 billion market value).

Still, Rutledge said that BearingPoint (BE: Research, Estimates), formerly known as KPMG Consulting, could be an interesting takeover candidate since its market value is less than $2 billion. A spokesman for BearingPoint would not comment.

Searching for software

On the software side, don't expect HP to get involved in the PeopleSoft-Oracle fracas, even though PeopleSoft disclosed in a regulatory filing Friday that it would consider a so-called "white knight" bid.

Robert Cihra, an analyst with Fulcrum Global Partners, said HP would be unlikely to buy a major application software company like PeopleSoft, which sells products that help companies manage their customers, supplier and human resource functions. He doesn't own the stock and Fulcrum does not perform investment banking.

But Cihra said a storage software company or infrastructure software company would be a good fit with HP's enterprise business division.

Storage software developer Legato Systems (LGTO: Research, Estimates) could be a fairly easy deal for HP to do, according to Michael Mahoney, managing director of EGM Capital, which runs a hedge fund focusing on technology, telecom and media companies. Legato would not comment.

Mahoney pointed out that HP already is Legato's largest reseller of software so the companies are fairly familiar with each other. Plus, Legato's market value is only $887 million. Legato was the subject of takeover rumors earlier this year. EMC, a competitor of HP in the storage business, was the mentioned suitor.

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BEA Systems, which develops infrastructure software that helps companies manage e-commerce capabilities, has been mentioned as a possible target for HP as well. Rutledge said BEA (BEAS: Research, Estimates), which competes against IBM's software division, could be a target since it has struggled as of late. The company reported in May that its first quarter licensing revenue fell from a year ago.

And despite the big tech rally, shares of BEA are down 4.5 percent year to date. Still, BEA would be a bigger deal for HP to digest, with a market value of nearly $4.5 billion. BEA did not return a call for comment.

HP's stock has surged 42 percent since March 11, which could make its shares more attractive to takeover targets. Plus, the company had $13.7 billion in cash on its balance sheet as of April 30. So even though HP may not be itching to a deal just yet, it clearly has the financial strength to pull something off.  Top of page

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