The world's largest PC seller, Hewlett-Packard
HP said it agreed to buy Autonomy for $11.7 billion, a 64% premium to Autonomy's Wednesday closing price on the London Stock Exchange. Autonomy makes software that searches and keeps track of corporate and government data. This will complement HP's existing offerings, giving it valuable intellectual property and enhancing its value in areas such as software and cloud solutions. At the moment, software accounts for only 3% of the company's revenue.
HP seems to be following the strategy that IBM
Hard to compete
Even though the computer business accounted for 30% of sales last quarter, it suffered from slow growth, low margins, and tough competition. The operating margin of this business last quarter was 5.9%, which is the least among all the company's segments. The company plans to surrender its vulnerable tablet computers and smartphones after facing strong competition from companies such as Apple
Overseas investment strategy
Under current tax rules, U.S. companies are subject to a specific tax charge on bringing foreign cash into the country. The New York Times noted that HP is a good example of one of those companies using its foreign cash pile to make strategic investments and overseas acquisitions, thereby skipping repatriation taxes.
As of March 31, the company had a war chest of $12.7 billion from the printing division, most of which comes from abroad. HP will use this "offshore cash" and debt to finance this deal. This seems to be an added benefit of the deal.
After HP's disappointing quarterly results, the acquisition of Autonomy -- whose annual revenue was $969 million -- will add to the company's earnings per share in the future.
The Foolish bottom line
HP is moving toward its core business in a tricky time for the company. These are the right sorts of moves to help HP get back on track. I think it may take some time, but a few years from now we could look back at the stock as being pretty cheap today. Fools, watch out.
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Navjot Kaur doesn't own any shares in the companies mentioned in this article. The Motley Fool owns shares of International Business Machines, Research In Motion, and Apple. Motley Fool newsletter services have recommended buying shares of Dell and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. 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. The Motley Fool has a disclosure policy.