Will Autonomy Save HP?

It's not every day that a company plunks down $10 billion and the news becomes a sidebar. But that's what happened last week when Hewlett-Packard Co. said it will acquire Autonomy for that amount.

The deal was overshadowed by the news that HP is weighing the sale or spinoff of its PC business, that it was shutting down its webOS hardware business and that it was lowering its revenue outlook for the year. All of that, and questions about the merits of its Autonomy acquisition, led to analyst downgrades and a 20 percent drop in HP's share price Friday (it recovered a bit Monday, gaining 3.6 percent).

The fact that HP is using the bulk of its $13 billion in cash reserves to acquire Autonomy, which will only account for 1 percent of HP's revenues, has not been well received. HP has signaled that it is transforming itself from a consumer and enterprise company to just an enterprise company, following in the footsteps of IBM. Seemingly, the plan is: Get out of low-margin businesses and focus on more profitable niches like software, services and the cloud.

But will Autonomy get HP there? And is the company squandering its cash reserves at that price tag, which is nearly 11 times revenues? CEO Leo Apotheker said on HP's earnings call Thursday that it is worth it. "Autonomy represents an opportunity for HP, for us to accelerate our vision to decisively and profitably lead a large and growing space, which is the enterprise information management space," Apotheker said.

"It also brings HP higher value business solutions that will help customers manage the explosion of information. But as we execute this deal, this will position HP as a leader in the large and growing space. It will complement our existing technology portfolio and enterprise strategy. It will provide differentiated IP for services and extensive vertical capability in key industries. We will provide IPG [Imaging and Printing Group] a base for content management platform. It will, over time, significantly enhance HP's financial profile. And the board believes that the transaction is accretive to HP's non-GAAP earnings in its first full year after completion."

Autonomy's flagship Intelligent Data Operating Layer (IDOL) software, which provides cross-enterprise search and content management, brings together silos of unstructured data including e-mail, text, Web pages, voice and video. It's used for e-discovery, records management, archiving and Web content management, among other things.

HP noted that Autonomy's revenue growth was running at a compounded annual growth rate of 55 percent. Its 25,000 customers include major corporations, law firms and federal agencies such as AOL, BAE Systems, BBC, Bloomberg, Boeing, Citigroup, Coca-Cola, Daimler AG, Deutsche Bank, DLA Piper, Ericsson, FedEx, Ford, GlaxoSmithKline, Lloyds TSB, NASA, Nestlé, the New York Stock Exchange, Reuters, Shell, Tesco, T-Mobile, the U.S. Department of Energy, the U.S. Department of Homeland Security and the U.S. Securities and Exchange Commission. 

It also has 400 OEM partners including Symantec, Citrix, HP, Novell, Oracle, Sybase and TIBCO.

Sounds good, but is all that worth $10.3 billion for a company that generated $870 million in revenues last year? Some analysts are questioning that. "The IDOL IP is stagnant. There hasn't been a major release of IDOL in over 5 years," wrote Forrester Research analyst Leslie Owens in a blog post.

"Buyers of its technology though have been less enthusiastic, regularly citing a firm that is arrogant in its dealings with customers, confused roadmap messages, and technology (particularly the core IDOL platform) that is overly complex and expensive to use," wrote Alan Pelz-Sharpe, a principal with The Real Story Group. "On the other side of the equation is HP, a hardware and services firm that has had very little success with software."

Others are more bullish on the deal. "The Autonomy acquisition brings a broad portfolio of information management technology, along with a growing number of search-based applications," IDC said in a research note. "Autonomy is a highly profitable software business, with a solid customer base worldwide and a significant cash reserve -- that is, it should add significantly to HP's margins."

Pointing to Autonomy's most recent earnings call, IDC noted that Autonomy's cloud business represents 62 percent of revenues today and is growing at a clip if 17 percent. "HP's converged infrastructure solutions are another linchpin of its risk management-aware cloud computing strategy," the IDC note said.

Apotheker said one-third of Autonomy's revenues are from its Software as a Service business. Autonomy also recently acquired Iron Mountain Digital for $380 million.

"Autonomy is successfully selling enterprise software into a market in which enterprise spending on technology is growing, even while IT budgets are flat or in decline," said Constellation Research analyst Michael Dortch in a blog post.

Nevertheless, the deal has a lot of people scratching their heads. One doesn't have to look too far to see HP doesn't have a problem making big investments and later changing strategies. While HP claims it will salvage its webOS software business, it seems all but inevitable that the company will be writing off its $1.2 billion outlay in Palm.

Time will tell if HP does better with Autonomy, but it sure seems like it spent a fortune for a company that only has some of the pieces of the puzzle it is trying to stitch together. And it remains to be seen how well those pieces fit.

Posted by Jeffrey Schwartz on August 22, 2011