Hewlett-Packard is commonly listed among the likely acquirers of software assets up for sale. Of course, HP made a big splash with its acquisition of Mercury Interactive and has openly maintained an interest in continuing to expand its software offerings.
Today, the company announced two new acquisitions: Opsware (OPSW) and Neoware (NWRE):
HP is offering $14.25 per share for a total consideration (net of cash/debt) of $1.6 billion. This represents just shy of a 39% premium to Friday's closing price, and a 33% premium over Opsware's 52-week high. This deal marks a triumphant outcome for a company that once looked destined to be swallowed up by the tech wreck of the late 90s. Founded by Marc Andreessen (Chairman) and Ben Horowitz (CEO) as Loudcloud, the company originally was part of the MSP wave. A few years ago (2002), they rebranded themselves as Opsware, sold the MSP business to EDS (who remains a large customer), and then went about selling the data center management software it created while building the MSP business.
Opsware has built out its suite of offerings over the last few years and, in the process, garnered more than 350 enterprise customers. As many of you know, this is a business that appears to have grown into a sweet spot, as the complexities of data center management have grown. From its website:
- Process Automation System -- Automates incident resolution and orchestrates change and configuration management
- Visual Application Manager -- Discovers and delivers a complete interactive map of your IT environment -- servers, software, network and storage
- Server Automation System -- Automates day-to-day management of large IT environment, easing managing of software and servers, and enabling your organization to work far more efficiently
- Network Automation System -- Ranked number-one for four years in a row, it provides the first proactive network change and configuration management solution that focuses on keeping costs contained, and quality and responsiveness high
- Opsware Network -- An optional offering that provides ongoing updates of security alerts and compliance policies
- Asset Management System -- Provides comprehensive visibility of your hardware and software assets
- Opsware OMDB -- Provides you the core foundation solution -- a comprehensive and accurate Operational Management Database
Ben Horowitz has been named the new head of HP's BTO (Business Technology Optimization) unit and will oversee both Opsware and Mercury assets, reporting to Ben Hogan. In terms of functional whitespace, Hewlett appears to be sticking to clear-cut infrastructure and tools plays, versus stepping on any applications related areas. While some may portray this as analogous to IBM's approach; there is a big difference when you consider that HP doesn't have a database or app server piece under its umbrella.
Opsware has been growing quite fast. With CY06 (Jan-07) revenues of $101.7mm represented a 66% year-over-year improvement. Excluding EDS (which is running flat at approximately $21mm annually), revenues grew north of 100% (to $80.5mm). Estimates for FY08 (CY07) show expectations of 50%+ YOY growth in the non-EDS portion.
Growth has come at the expense of profitability. On a GAAP basis, Opsware lost $16.1mm in FY07, but had guided toward NON-GAAP profitability of $0.09-$0.13 per share this fiscal year.
HP paid a "strategic" premium. With so much M&A happening, it's important to understand the distinction between deals that make pure financial sense (e.g., paying a low multiple of annual maintenance revenue and viewing the deal as attractive purely on the company maintaining its current customers) and those deals that are, instead, strategic. Clearly, HP views the Opsware deal as strategic given the multiples it's offering to pay:
- 16x EV/trailing 12 months revenues
- 10x EV/FY07 guidance ($142-$147mm)
- 110x-158x NON-GAAP forward earnings ($0.09-$0.13)
- 137x Merrill Lynch's FY08 cash flow estimate ($11.6mm)
- 47x Merrill's FY09 cash flow estimate ($34.3mm)
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HP is offering $16.25 per share for a total consideration of $214mm net of cash. Unlike Opsware, HP isn't offering a substantial premium on this acquisition. The offering price represents just 6.6% premium over Friday's closing price, and is 3.6% above its 52-week high.
This deal brings together the #2 (Neoware) and #3 (HP) makers of thin-client computing devices; and theoretically positions the company at parity with Wyse, the market leader. Wyse is privately held, so it's difficult to measure it's financial traction, but Neoware had struggled to meet Street expectations of late. Kevin Hunt, an analyst at Thomas Weisel Partners, noted that Neoware had missed his estimates for six consecutive quarters and had yet to show an improved trajectory in spite bringing in Klaus Besier as CEO several quarters ago.
Potential strategic reasons for the Neoware deal:
- Could signal a bigger push into virtualization and Linux for HP. Regardless of Neoware's financial metrics, they have been out in front of the Thin-client Linux movement and, more recently, announced a series of virtualization-oriented products.
- Removes competitive friction. Don't underestimate the power of removing a fierce competitor from the landscape. While HP was cautious on the call about product roadmap and migration plans, clearly this combination allows HP to generate scale and more effectively target Wyse, the market leader without having to fight against multiple fronts.
- Klaus Besier's addition. Besier ran SAP America years ago and has experience with big enterprise accounts; he should be a solid addition to the HP executive team.
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A few takeaways and parting questions about today's deals:
- HP clearly isn't afraid to pay a full valuation for companies it views as strategic. Paying 10x forward revenue for Opsware, a marginally profitable company, is clearly a bet on strategic value. And while Neoware's 2x/EV/sales doesn't appear lofty, given the company's revenue and earning trajectory, it too is a bet that HP can turn thing around and squeeze more juice from the fruit.
- Why a conference call on Neoware but not Opsware? I'm left to wonder why HP hosted a conference call today to discuss the Neoware transaction ($214 million) while eschewing a call for Opsware ($1.6B purchase)?
- More deals to follow? The aggressiveness of disclosing both of these deals simultaneously and comments made today by HP executives signals they will continue to look for more targets if the price and strategic fit make sense.
- Will HP round out its infrastructure stack and, if so, with what acquisitions? The combination of Opsware (data center management) and Mercury (applications monitoring and testing) put HP in a potentially powerful position in the world of systems management, but what are its intentions in other areas like app server, database, content management and enterprise security?
- What does this mean for BladeLogic, and its pending IPO? It's curious timing that Opsware should be acquired just a day or two before BladeLogic, its closest comparable, is set to list its shares (proposed symbol: BLOG). Given the multiple Opsware went out for, BladeLogic has reason to smile it would seem. But will the company list its shares as planned, or does this portend a potential private buyout before we public equity investors get a chance to stake our claim?
- Marc Andreessen can now focus on Ning (and his blog). Andreessen has been serving as Chairman of Opsware while also running Ning and, of course, writing a damn good blog. Presumably he'll now have more time to focus on building out Ning and going for the entrepreneurial trifecta (i.e., Netscape, Opsware, Ning).
- Don't underestimate the importance of the virtualization play. With the VMWare IPO looming, you can be sure that plenty of companies will continue to draw awareness to their roles in the burgeoning virtualization landscape. I expect a LOT more virtualization news, rhetoric, product announcements and M&A activity in the coming 12-24 months.
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Note: This is not a recommendation to buy or sell any publicly-traded security. This discussion is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain a position (long or short) in BladeLogic, EMC, HPQ, IBM, OPSW or NWRE. We reserve the right to initiate positions in any of these companies at any time in the future. At times, we may maintain derivative options as a hedge on underlying positions.
opsware neoware m&a investing datacenter thinclient hp hewlettpackard consolidation bladelogic andreessen ning woodrow enterprise+irregulars
shouldn't it be "six consecutive quarters" instead of "sex consecutive quarters" ?
Posted by: vp | July 23, 2007 at 11:45 PM