October 6, 2009 / 5:24 AM / 8 years ago

HP may be ready to deal, as tech M&A heats up

By Gabriel Madway - Analysis

An HP Invent logo is pictured in front of Hewlett-Packard international offices in Meyrin near Geneva August 4, 2009. REUTERS/Denis Balibouse

SAN FRANCISCO (Reuters) - Hewlett-Packard Co may get acquisitive again despite its recent absence from the technology sector’s M&A scene, analysts said, and Brocade Communications Systems Inc may a prime target.

Brocade is putting itself up for sale, and HP has looked at the company’s assets but has not made a formal bid, sources told Reuters. Brocade and HP declined to comment.

Brocade makes routers and switches for blade servers, as well as software to help companies manage data efficiently. It has been expanding its partnerships and already sells equipment to HP, International Business Machines Corp and Dell Inc.

Analysts say HP’s sprawling portfolio has cushioned it against the shock of the IT spending downturn, but that investors now want to see the world’s largest computer company move to ramp up growth. Some say one way to do that is through acquisitions.

Stifel Nicolaus analyst Aaron Rakers said HP is likely looking to acquire in areas such as software and networking, to complement its ProCurve networking product.

HP has been relatively quiet on the M&A front, Rakers said, given that the company is still working through last year’s blockbuster $13 billion acquisition of EDS.

“As we roll out into the next couple of quarters, I wouldn’t be surprised to see them do something,” he said.

Kaufman Bros analyst Shaw Wu said HP and its rivals are focused on offering customers an end-to-end suite of products. Cisco recently began selling computer servers targeted at data centers, pitting the company against HP and IBM.

“It makes sense for HP to add to its portfolio in two areas: one is networking, the other is software,” Wu said. “The more software and the more networking that they do, the better the margins.”

Wu said Brocade would be a good fit for HP, noting that an offer for Juniper Networks — another tie-up much speculated on in markets — the No. 2 networking equipment maker after Cisco, would be a bolder and more expensive move.


Juniper’s market capitalization of roughly $13.8 billion is more than three times that of Brocade. F5 Networks is another networking name that crops up in acquisition talk.

As the IT sector has stabilized, the economy steadies and credit looses, M&A has been picking up. Last week, Cisco agreed to acquire Norwegian videoconferencing company Tandberg for $3 billion, leading analysts to wonder whether HP would respond.

There were also major deals in an IT services sector that analysts say is ripe for consolidation: Dell’s $3.9 billion bid for Perot Systems Corp and Xerox Corp’s $5.5 billion play for Affiliated Computer Services.

HP has a formidable warchest of $13.7 billion in cash should it decide to deal. It has made more than 45 acquisitions since 2001.

Besides EDS, major deals in recent years include the $4.6 billion acquisition of Mercury Interactive in 2006, and the $1.5 billion purchase of Opsware in 2007— two of the more than two dozen software deals HP has made since 2001.

The company wages battle on many fronts in the IT sector, from Dell and Acer in PCs, to IBM in services and servers, to printers.

Pacific Crest Securities analyst Brent Bracelin said last week that HP has been in “digesting mode” with EDS but added: “I would expect them to get back into an environment where they become much more aggressive as they enter 2010.”

“HP isn’t in a position where they’re going to be left out of the consolidation race.”

HP has been tightly managing costs as it works through the EDS deal. It expects to generate $3 billion in savings by the time the integration is complete.

Rakers said the services sector deals in recent weeks provide more evidence that HP’s purchase of EDS was a smart one.

“The EDS stuff was validated, if you look at the multiples that Dell’s paying for Perot,” he said.

Editing by Edwin Chan; Editing by Richard Chang

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