UPDATE 3-HP to spin off PCs, $10 bln Autonomy buy-sources

Thu Aug 18, 2011 3:06pm EDT

* HP to buy Autonomy - source

* PC unit spinoff planned - another source

* Deals will be announced Thursday - sources (Adds analysts' and investor's comments, details on HP)

By Megan Davies, Poornima Gupta and Victoria Howley

NEW YORK/SAN FRANCISCO/LONDON, Aug 18 (Reuters) - Hewlett-Packard Co (HPQ.N) is close to a roughly $10 billion deal to buy British software company Autonomy AUTN.L, a source said on Thursday, and it will announce a long-rumored spinoff of its PC division, according to another source familiar with the company's plans.

Shares in HP, a storied Silicon Valley icon that dominates the personal computing industry, climbed briefly into positive territory as Wall Street cheered its bold foray into the high-margin software arena and the hiving-off of a struggling personal computing unit.

But the shares backtracked ahead of HP's quarterly earnings report due after the market close on Thursday, declining 3 percent to $30.45.

A spinoff of HP's PC arm would confirm speculation that has swirled for months that HP was no longer keen on keeping a business struggling with low growth and single-digit margins.

And it would mark a historic shift -- mirroring International Business Machines Corp's (IBM.N) own transformation -- for a company that Bill Hewlett and Dave Packard built into a sprawling $120 billion empire from a $538 garage operation in 1939.

"HP is recognizing what the world has recognized, which is hardware in terms of consumers is not a huge growth business anymore," said Michael Yoshikami, chief executive of YCMNET Advisors, a minor shareholder in HP.

"It's not where the money is. It's in keeping with the new CEO's perspective that they want to be more in services and more business oriented."

Sources had told Reuters in June that private equity firms from Blackstone Group (BX.N) and Kohlberg Kravis Roberts [KKR.UL] to TPG Capital [TPG.UL] would like HP to break up and sell them some of its units, arguing that the world's No. 1 PC maker and tech powerhouse is stretched too thin, according to people familiar with the matter. [ID:nN1E75S0GT] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

TIMELINE-HP [ID:nN15248346]

HP must convince with earnings [ID:nN1E77G201] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

LEO MAKES BOLD MOVE

Spinning off the PC division, which is run by personal systems group chief Todd Bradley, would mark one of the biggest transformations for the company since 1999, when it spun off its measurement and components businesses to form Agilent Technologies (A.N).

In 2001, it engineered an acquisition of PC rival Compaq, laying the foundation for its later domination of the sector.

The company plans to announce the spinoff after the market closes, a source told Reuters on condition of anonymity, confirming a report by Bloomberg.

Bloomberg reported HP could pay $10 billion for Autonomy, which is valued at above $6 billion.

HP CEO Leo Apotheker, a former chief of European software giant SAP AG (SAPG.DE), had been expected to drive an expansion of the company's relatively small but very profitable software division -- including through major acquisitions.

Autonomy confirmed it was in talks with HP regarding a potential acquisition, but declined to elaborate and said further announcements would be made when appropriate.

The British firm's CFO, Sushovan Hussain, is on a visit to California, a third source told Reuters.

Cambridge-based Autonomy counts Procter & Gamble Co (PG.N) among a long list of major corporate customers that use its software to search and organize unstructured data like emails. Last month, it posted a 16 percent jump in quarterly sales-driven demand for Internet-based cloud computing. [ID:nL6E7IR1CC]

"HP would be buying this as part of a refocus of the business on software. They have been talking for a while about a focus on software," said Tim Daniels, technology, media and telecoms strategist at Olivetree Securities.

"Clients now don't have a problem accumulating data, the problem is the structuring of it. Eighty percent of the data on the Web now is unstructured: video, pictures, emails, etc." (Additional reporting by Victoria Howley and Georgina Prodhan in London ; Writing by Edwin Chan in Los Angeles; Editing by Lisa Von Ahn and Richard Chang)