A Merger that Makes Sense—for a Change

Confirming rumors that have been swarming around this Valley for weeks, Hewlett-Packard's newish chief exec, Mark Hurd, announced last week that his company would acquire Mercury Interactive . Palo Alto, CA-based HP plans to take on the assets of its neighbor in Mountain View in a cash deal valued at about $4.5 billion. Hurd said that the acquisition will double his company's software revenue to more than $2 billion annually. The combo of product lines will make HP ''an end-to-end leader in IT management,'' he said, and ''a software company to be reckoned with.''

I heard from a lot of people on this one. Neil Ward-Dutton, research director at UK-based Macehiter Ward-Dutton sees the acquisition as a kind of recognition that HP's software business ''has hitherto been a bit of a passenger in its business overall, the runt of the litter, if you like.'' (Hitherto? Only a Brit...) With this acquisition, HP is betting that its software business will finally become a force in its own right, he says, with decent growth and profitability prospects. He also believes that HP was wise to add the management piece, rather than pursuing app servers, app integration solutions, and other tangential technologies. (Be sure to check out his blog posting on this acquisition.)

Analyst Ron Schmelzer at Baltimore-based ZapThink sees MI's appdev lifecycle technology (which is pre-deployment management software) as the right complement to HP's OpenView products (which are designed for managing systems in deployment). He noted that the acquisition includes the Systinet Web services registry technology that MI purchased earlier this year, which looks good paired with HP's SOA Manager. ''Now HP has testing, lifecycle management, quality management, version control, and governance,'' he says. ''They've just filled in a big missing piece in their management picture.''

His partner, Jason Bloomberg, believes that this merger puts HP in direct competition with Computer Associates and IBM. It's now a three-way contest to see who can put together the most complete enterprise information management offering. He agrees that the Systinet registry is a particularly juicy nugget in this deal, and could prove to be HP's answer to IBM's new Web services registry product.

That Systinet piece was also interesting to Miko Matsumura, who, before becoming VP of technology standards at SOA governance company Infravio , was VP of product marketing at that company. ''HP, Mercury, and Systinet provide a strong solution for governance, but it's weighted heavily towards centralized IT and control of IT systems,'' he says. ''Line-of-business owners want SOA for the agility it provides. They are interested in deploying applications rapidly and with the least possible amount of hassle.''

I also heard from another HP competitor: Austin, TX-based IT management solutions provider PlanView Software. In an open letter sent to me via email, the company's CEO, Pat Durbin, wrote: ''Over the past several years infrastructure vendors from IBM to Compuware and CA have been buying portfolio management vendors. It is very possible that the HP-Mercury deal is rooted in the Mercury testing business (IT supply side), but along with it comes the Mercury IT governance product line (business demand side)... While HP will not be changing the direction that Mercury was going, the acquisition continues to concentrate IT performance management tools within the IT infrastructure vendors. We at PlanView do not believe that approach is in the best interests of IT organizations and their leaders.''

On Friday I had a chance to talk with Mercury Interactive's Chris Lochhead, who is often credited with coining the term ''business technology optimization'' (BTO). Just a year ago, BTO was an emerging industry category; today, solutions designed to optimize technology and business processes in the enterprise are fast becoming de rigueur , and the concept is the heart of what MI provides. Lochhead is a marketing guy, and he was excited about the acquisition, so I wasn't surprised to hear him pumping a bit of macho sunshine. ''It was a great day for our customers, our people, and our shareholders,' he told me. ''We're going to be part of a $2 billion dollar business with the backing of a $90 billion company, so we expect to kick a lot of ass in the marketplace.''

But Lochhead is also a smart guy, and he quickly got down to the synergies involved in the merger. ''We have a similar vision, but both companies have executed on that vision from a different point of view,'' he said. ''HP came at it from the infrastructure up; Mercury from the applications down. And we believe the two product lines will come together very well.'' He also pointed out that integrating the two product lines is likely to be fairly easy, because there's so little overlap between Mercury's software and HP's products.

Mercury Interactive, as everyone in this Valley with an IQ above 10 knows, is among more than 80 companies under investigation by the SEC for possible stock option timing and exercise price abuses. But Lochhead insisted that the backdating scandal that sent three top MI execs (including chairman and CEO Amnon Landan) packing last year was not a factor in the acquisition. Despite executive perfidy, he points out, the company has continued to grow, to update its core products, and to maintain its brand name. And earlier this month, MI completed the restatement and recertification of its financial statements for the fiscal years 2004, 2003, and 2002. ''We dealt with that problem head on,'' Lochhead said. ''We did the best possible job with it that we knew how to do, and we kept it separate from our business. I don't believe that the backdating problems really had much to do with the acquisition.''

Still, being one of the first companies named in what may prove to be the broadest stock-option scandal in history had to ripen the company at least a bit. I'm with analyst Rob Enderle of The Enderle Group , who believes that MI's SEC troubles helped to make the company, if not a targe, at least more acquirable . ''They were under a dark cloud, and this merger allows them to step out from under,'' Enderle says. ''The individual execs are still going to be looked at, but this moves the company beyond those problems—and it may get the board out of hot water.''

Or maybe not: As I understand it, the SEC is still considering filing civil charges against company directors. MI's CFO David Murphy has said that it could cost the company $70 million, an expense against which HP probably can't protect them.

And it may look like smooth sailing ahead on the integration front, but these things are rarely as quick and easy as the principals hope. One area where the two companies are likely to run into some challenges, observes ZapThink's Schmelzer, is in the integration of their very different sales forces. Mercury is known to have a more aggressive bunch (I think they're mostly Israeli paratroopers), and the products are complementary, but very different. '' HP has a significant customer consulting business,'' Schmelzer says, ''and those folks are going to have to learn how to sell the Mercury stuff. That's likely to be new to them.''

Just to be clear: In my humble and loving view, execs who swindle their shareholders and leave their employees out in the cold should swing for their crimes. From an actual rope. In whatever passes for a town square these days—say, at the mall. But execs who face the truth about their organizations' problems and take steps to correct them should be acknowledged for that, too, though they rarely are. Mercury Interactive fessed up to 54 intentional acts of the startlingly common practice of stock-option backdating, bounced the executives involved, restated the company's earnings, and protected the brand.

Somebody should get a little plaque or at least a coffee mug.

 

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