HP buys Mercury for $4.5bn in cash
Agencies
Hewlett-Packard is biting off its biggest acquisition in four years with a $4.5bn purchase of Mercury Interactive, a maker of business management software that has been entangled in a stock options scandal
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The Economic Times
Synopsis

Hewlett-Packard is biting off its biggest acquisition in four years with a $4.5bn purchase of Mercury Interactive, a maker of business management software that has been entangled in a stock options scandal

SAN FRANCISCO: Hewlett-Packard is biting off its biggest acquisition in four years with a $4.5bn purchase of Mercury Interactive, a maker of business management software that has been entangled in a stock options scandal.

The deal, announced on Tuesday by computer and printer maker Hewlett-Packard, isn’t cheap. The all-cash price works out to $52 per share, a price that Mercury’s long-slumping stock hasn’t topped for more than two years. HP’s offer represents a 33% premium above Mercury’s closing price of $39 in the over-the-counter market.

The deal, expected to close late this year, represents HP’s biggest acquisition since the Silicon Valley icon paid $19bn for Compaq Computer in ‘02. That takeover incensed an heir of a company co-founder, who led an unsuccessful shareholder rebellion, and later contributed to a sales funk that culminated in last year’s ouster of HP’s flamboyant chief executive, Carly Fiorina.

Now, Fiorina’s low-key replacement, Mark Hurd, is betting Mercury’s product line will justify the hefty price being paid for a company embroiled in legal turmoil. The expansion marks a shift for Hurd, who has made his mark so far by streamlining HP.

Hurd, who has boosted HP’s market value by $24bn since his arrival 16 months ago, assured analysts he didn’t buy Mercury Interactive on a whim. “We didn’t do this lightly,” he said during a conference call.

He also predicted Mercury Interactive will enable Hewlett Packard to double its annual software sales to about $2bn. “By buying Mercury, HP will have one of the most powerful software portfolios in the industry,” Hurd said. Investors seemed skeptical, a frequent response whenever a company is making a large acquisition. HP’s shares gained 26 cents to close at $31.33 on the New York Stock Exchange, then shed $1.23, or 3.9%, in extended trading.

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Mercury has been more closely associated with scandal than software in recent months because it was among the first companies to acknowledge its top executives improperly manipulated the timing of stock option awards to increase their potential windfalls.

In November, Mercury ousted its longtime CEO, Amnon Landon, as well as two other top executives after concluding that they looked back in time for a low point in the company’s stock price so the exercise, or ‘strike,’ price of their options could be set at that ebb, a practice known as ‘backdating.’

More than 60 other companies, including many in Silicon Valley, also have disclosed internal or regulatory inquiries into a potential backdating of stock options.

Mercury’s shake-up left it in financial limbo as a new management team tried to figure out how much the stock option manipulation had caused the company to overstate its earnings through the years. While it investigated, Mercury wasn’t able to meet regulatory deadlines for reporting its financial results — a delay that caused its shares to be de-listed from the Nasdaq Stock Market.

Earlier this month, Mercury erased $525m in profits dating back to 1992. The company still faces lawsuits from shareholders alleging management misled them. The Securities and Exchange Commission is conducting an investigation that could culminate in substantial penalties, as well.

“We think we have our arms around,” Mercury’s potential legal liabilities, Robert Wayman, HP’s chief financial officer, told analysts Tuesday.

“Mercury’s legal headaches won’t matter to customers, said Ann Livermore, a HP executive vice president who oversees the company’s software operations. That division generated revenue of $1.08bn for HP in its last fiscal year. Mercury posted sales of $843m last year.

Hurd believes Mercury’s products will serve as an ideal complement to HP’s software, which primarily helps companies ensure their computers continue to run smoothly.

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Mercury’s software helps companies manage the hodgepodge of business applications that administer payrolls, sales and supplies. Although HP has been cutting its costs since Hurd’s arrival, most of Mercury’s 3,000 workers are expected to retain their jobs. Even so, the cost-conscious Hurd assured `there will be no stone unturned’ as he searches for ways to make sure the Mercury acquisition pays off.

HP already is in the process of eliminating 15,300 jobs. The company ended its last fiscal year with 1,50,000 employees.

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