Leo Apotheker’s recent unveiling of the HP strategy to focus on software and services and sell off the device and printer business units has triggered a fascinating dance in the tech sector. Here is a look at the basics and what it could mean to CIOs.
Why did HP announce this strategy?
It is fundamentally about enterprise software. As Leo knows from his tenure at SAP and HP Chairman Ray Lane knows from his days at Oracle, software earnings are high and sticky and they drive up share prices accordingly.
Regardless of the status of HP’s Printer and PC business, those products are commodities and distract from HP as an enterprise software and cloud business.
So why the sudden speculation frenzy on HP?
Well the HP shareholders don’t like the changes and apparently don’t trust Leo. The stock price tanked 20% on the announcement, this brings total declines in HP market
cap of around 40% since Leo took the reigns just last November and is almost
exactly half of the 52 week peak.
This makes HP extremely vulnerable to acquisition.
Why would Oracle want HP?
Ever since the Oracle Sun acquisition, Oracle has viewed HP as target practice for taking on IBM. They pulled out of the HP alliance and recreated Exadata as a Sun-based Red on Red attack on HP and IBM server stacks.
Larry then recruited Mark Hurd to drive the growth strategy after he was pushed from HP following an “expenses claim” dispute. Leo was then subpoenaed by Oracle as a material witness in Oracle vs SAP IP theft case, but managed to avoid this pressure when HP claimed the subpoena they had been served for Apotheker’ attendance only arose after, and because, they had recruited him as CEO.
Oracle won the case with an astounding $1.3bn dollar damages award that SAP is still reeling from, and appealing against. Oracle then repriced its database licensing for clients on Itanium which made HP Server TCO more expensive than IBM or Oracle.
Then, to add insult to injury, Oracle withdrew future software development for the Itanium chipset. In a move that inflamed Leo and many HP clients, HP is now suing Oracle.
Finally in the sporting stakes, Oracle has been pushing a “Cash for Clunkers” marketing campaign which ridicules HP technologies.
In the consolidation battle for enterprise software and cloud domination, HP would add a useful range of system management, storage and networking technologies and revenue streams. HP Enterprise Services (which includes all of the EDS acquisition) would also give Oracle a significantly enhanced capability in this area. The focus on the enterprise would, of course, make more sense if its PC and print businesses do get hived off.
Adding the key assets of the HP enterprise business would see Oracle with real potential to usurp IBM as enterprise leaders. This critical mass of IP, market share and earnings would put Oracle in such a dominant position when enterprises seriously start migrating IT to the cloud that it would be difficult to envisage many serious challengers into the foreseeable future.
If Larry was a megalomaniac wanting to take over IBM’s top spot and leave behind him a legacy of total enterprise computing domination, the combination of competitive sport and the acceleration of strategic ambition could well be attractive.
Don’t forget that Oracle’s first strategic acquisition was only in 2002 when it took PeopleSoft after they themselves had acquired JD Edwards and relegated Oracle to third place in the enterprise applications space.
This quick reaction was followed by a successful integration and a series of further enterprise software acquisitions. When Oracle took over Sun it was largely as a knee jerk reaction after IBM announced its interest in Sun.
HP’s enterprise business would add $57bn to Oracle’s $35bn to total $92bn turnover based on the last full-year figures. Based on HP’s current share price it’s safe to say that HP is not beyond Oracle ambition and I imagine the M&A team are busy at present.
So, those are the arguments for the takeover, join me in part two as we explore the other side of the coin and when I reveal that actually, I’ve got to agree with those that say this would be an acquisition too far for Oracle.