Solving HP's Software Puzzle

By now, you've heard all about Hewlett-Packard (NYSE: HPQ  ) putting its market-leading PC division out to pasture along with what remains of the $1.2 billion Palm purchase. You may also have noticed that HP is paying more than $10 billion for an obscure British software firm called Autonomy. But you may not have figured out what HP will do next -- even though all the signs are in place.

One big mistake?
Fellow Fool Eric Bleeker cast a wary eye at the Autonomy deal, mostly because HP had been considering big-ticket buyouts of Teradata (NYSE: TDC  ) or Tibco Software (Nasdaq: TIBX  ) in Autonomy's place.

"While Tibco, Teradata, and Autonomy all target the enterprise, their technology is very different," Eric wrote. "It looks like HP's strategy amounts to 'find a high growth software company and worry about the details later.'"

And that's where I beg to differ. I think it's obvious that HP is being recast as a software company that happens to sell a little bit of hardware rather than the other way around. As such, I think HP was only deciding where to start buying software businesses -- not defining its entire strategy in one bold move.

The first step of a long journey
Autonomy's strength lies in cataloguing large amounts of unstructured data. The cutely named IDOL technology lets you run fast searches over massive data stores and even find related items starting from a hand-picked example.

Aside from organizing large data warehouses, the technology can also be used as the underpinnings for enterprisewide search services, Web publishing frameworks, and data analysis.

If that wide range of use cases reminds you of IBM (NYSE: IBM  ) WebSphere or Microsoft SharePoint, you're on the right track. What HP just bought is a framework around which the company can build a vast range of enterprise-class software packages.

What's next?
So what else can HP buy and bolt onto Autonomy, in order to continue its quest to become even more like software arch-rivals IBM and Oracle (Nasdaq: ORCL  ) ? I have a few ideas:

  • Tibco CEO Vivek Ranadive reportedly told his board that he could bring Tibco shares up to "the high $30s" (or nearly double today's price) without a buyout premium. But just because Tibco turned down HP's first offer doesn't mean that Apotheker won't come back with an even fatter deal. The in-memory data management and analysis software would dovetail nicely with Autonomy and give customers a powerful all-in-one package indeed.
  • Likewise, Teradata could be a nice plug-in down the road. However, this one is less likely than a Tibco double-dip because Teradata's product lineup overlaps more with Autonomy -- there's less add-on value here, even though Teradata is bigger than Tibco.
  • Timely Rule Breakers recommendation Informatica (Nasdaq: INFA  ) , on the other hand, would instantly turn the Autonomy acquisition into a WebSphere competitor up and down the line. Where the first purchase brought in analysis and search tools, the second one would complete the big, blue ball with a common data format and information lifecycle management policies.
  • Given Apotheker's SAP background, you'd also have to consider some good old business intelligence or customer relationship management tools, like CRM specialist salesforce.com (NYSE: CRM  ) . Yeah, that ticker is a dead giveaway. Plugging Salesforce into an Autonomy backend with HP's global reach and financial strength would cause an epidemic of acute migraines across Oracle, IBM, and the new SAP leadership.

Patience, young grasshopper
Of course, these moves will have to wait until the Autonomy buy closes and until HP's coffers get refilled by the PC segment's exit strategy. But it's never too early to size up the potential targets. It's smart to load up your watchlist right now so you can make some moves when Apotheker starts to tip his hand. Get started in just a couple of clicks:

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Motley Fool owns shares of Oracle, Microsoft, and IBM. Motley Fool newsletter services have recommended buying shares of Informatica, salesforce.com, Teradata, Microsoft, and Tibco Software. They have also recommended creating a bull call spread position in Microsoft and shorting Salesforce. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.


Read/Post Comments (3) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 24, 2011, at 3:28 PM, lightray9a wrote:

    Autonomy is a Cloud play. The true benefits of the cloud will be the ability to link disparate sources of data to satisfy user requests for KNOWLEDGE (not just information). Think Star Trek.

  • Report this Comment On August 25, 2011, at 9:55 AM, teluguniceguy wrote:

    TIBCO's in memory analytics is just a small piece of its product portfolio. If some company buys TIBCO it would be for more than just in memory analytics which is about 15% of its revenue contributor. I would say it's better to do some research before your write something. TIBCO's main bread and butter is SOA, Messaging and Business Optimization. If someone buys TIBCO it would for these products rather than for just Spotfire. If I have to buy, then I wouldn't spend about $6B for just in memory analytics which doesn't have more than $200M in revenue.

  • Report this Comment On August 29, 2011, at 9:41 PM, ykarabag wrote:

    Teluguniceguy: Right on! Buying TIBCO for in-memory analytics is like buying microsoft for flight simulator!

    I am surprised at the lack of research here...

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