Saturday, July 29, 2006

Another good move from HP

HP announced last week that it was buying Mercury Interactive in a cash deal that involved an impressive premium. This is a good move for HP though the price paid, $4.5 billion, is a bit high for a company whose executives deserve life sentences for options' abuse. HP may still have to bear the cost of any fines/strictures resulting from the current probe.

HP likely paid such a rich premium to foil a competing bid from IBM or even Computer Associates. IBM must have considered buying Mercury and had that materialized, HP would have been left without a quality target in this area. Mercury going with HP is a minor setback for IBM.

But for the remaining independent monitoring/management software vendors, it is time to find partners before they become irrelevant. Quest Software (QSFT) and BMC (BMC) will be evaluating their options. BMC has been rumored to be a target for private equity groups, and that may yet happen. Any buyer of BMC will also be looking at buying CA to build a more complete portfolio.

Quest could be bought out by IBM or CA, but it won't be in a position to bargain for a rich premium. Quest's tools aren't really as feature-rich or complete as the offerings from others. The main attraction for a buyer of Quest is its installed customer-base.

The next set of targets will be network/traffic monitoring/management tools vendors. Integrating these with the application numbers will provide for a more complete performance picture of an enterprise. Look for Keynote (KEYN), Netscout (NTCT) and Packeteer (PKTR) to be targets soon. Keynote is trading at close to its cash value, and is a bargain buy right now.

NetIQ was another potential target, but it was taken private recently.

I had posted earlier on Mercury's options probe, as well as guessed possible buyers for Mercury when rumors first surfaced about a buyout.

HP is slowly compensating for its big mistake in not going after Veritas earlier. It should not have allowed Symantec to acquire Veritas. Given the frosty reception, there may still be room for Symantec to sell its Veritas division to HP. That should be a relief for Symantec shareholders who have seen the value of their holdings drop 50% since the Veritas merger.


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