If you’ve followed the trials and tribulations of the computing giant Hewlett-Packard over the last several years, you have to be wondering when the long-promised turnaround is coming.

A lot has happened since Meg Whitman took over as CEO in 2011. Back then, HP was weighed down by too many people, spiraling debt, poorly executed and expensive acquisitions and declines in practically every one of its lines of business. Some of those things have improved a little. But not all of them.

HP’s debt excluding its finance division is now zero. It is well on its way to reducing its headcount by 34,000 people — some would say that’s not enough — and in 2012 it swallowed the bitter pill of a combined $17 billion in write-downs on two big acquisitions, EDS (2008) and Autonomy (2011).

Still unsolved: Declining sales in nearly every HP line of business. PC sales, its biggest business unit by revenue, fell last year by 10 percent to $32 billion. Enterprise hardware, its second largest, fell by five percent to $28.3 billion. Printing, No. 3 by revenue, fell by more than two percent to just below $24 billion. Enterprise services, the last of the four biggest business units, fell by more than eight percent. All told, these four business units account for 93 percent of HP’s revenue.

That leaves software, which at $3.9 billion amounted to a relative sliver of only four percent of revenue last year. You’d think that a technology company like HP would have a larger software business, but it doesn’t. In fact, the only reason the unit is even that big is because since 2010, HP has spent more than $13 billion buying software companies.

Most of that money, by HP’s own admission, was spent badly. The biggest example was Autonomy, the British software firm for which HP paid about $11 billion in 2011. Since then HP has infamously conceded that it overpaid for Autonomy by about $8 billion and change. HP further alleged that Autonomy’s management cooked the books in order to inflate its value, a charge Autonomy’s ex-CEO Mike Lynch has denied. Regulators in both the U.S. and the U.K. are sorting it out.

But no matter how you slice it, since 2011, HP software sales have grown by only $552 million. Put another way, for every dollar that HP software sales have grown in the last three fiscal years, HP spent nearly $24 buying software companies. And even after backing out the $8 billion write-down for Autonomy, that works out to $9 spent for every one dollar in growth. That’s not the way acquisitions are supposed to work.

The other three acquisitions were ArcSight, a security software firm acquired in 2010 for $1.5 billion, and, in 2010 and 2011, Vertica, a data analytics software firm, and Fortify, another security firm, for which HP paid a combined $600 million.

The good news about HP’s software business is that with its gross operating margins of about 22 percent, it’s the company’s most profitable business unit. The bad news is that it’s less profitable than those other software companies. Adobe Systems is a software company about the same size as HP’s software unit: Its most recently reported annual operating margin was north of 35 percent. Before McAfee, the security software company, became part of Intel, it had about $2 billion in annual sales and an operating margin of 26 percent.

(Update and clarification: I’ve revised the paragraph above to correct an accounting mistake. I was comparing HP Software’s operating margin to the gross margins of Adobe and McAfee. Since HP doesn’t disclose the unit’s gross margin I re-did the math to craft an apples-to-apples comparison, and found that the original point still holds, though it’s not quite as pronounced as before.)

Part of the reason for the software unit’s difficulties, HP says, is the fundamental shift in the marketplace away from companies that sell their software to be used “on premise,” and toward software-as-a-service (SaaS), or “in the cloud.” Companies like Salesforce.com, Netsuite and Workday have all built thriving businesses selling software that runs in a customer’s Web browser. HP has some SaaS products in its portfolio. But it’s better known as a SaaS customer: Salesforce and Workday both claim HP among their biggest customers.

So what’s the answer? Believe it or not, probably more acquisitions. With HP’s operating debt paid off and $12.2 billion on the balance sheet, Whitman was signaled in interviews that HP may be on the hunt for an acquisition or two in 2014. In an interview with me last summer she said HP needs a “strategic acquisition that help in one particular area of our business.” She was clearly talking about software.

After the mess that went down with Autonomy, HP’s dealmakers are likely to scrutinize any potential target like no other before it. So don’t expect Whitman and HP’s board to sign off on any “transformative” deals. But a small- to medium-size deal for an SaaS company with healthy growth prospects, some logical connections to HP’s existing businesses and a reasonable valuation seems like a solid bet at HP before 2014 is over.

With the caveat that I have no insight into who HP might consider buying, here are some names that come to mind, some more realistic than others:

Jive: If you buy into the argument that corporations want to collaborate more using social tools — and indeed not everyone does — then you have to think about Jive, which sells both on-premise and a cloud-based products. It’s currently valued at about $770 million and is expected to book annual revenue of about $180 million in fiscal 2014. At $11.12 a share as of Friday’s close, Jive is trading at about 60 percent below its highest valuation. HP could offer $1 billion and still pay less than six times forward revenue, which is roughly in line with the valuation of Salesforce.com, the king of the cloud software companies. That would still be less than the $1.2 billion Microsoft paid for Yammer, Jive’s most significant rival. Also, Jive’s CEO, Tony Zingale has a history with HP: His last gig was as CEO of Mercury Interactive, which HP acquired in 2006 for $4.5 billion.

Rally Software: This cloud-based provider of software development tools went public last year and has a current market cap of about $475 million. Assuming a 20 percent premium would leave it with a realistic valuation of about six times forward revenues.

Proofpoint: Another cloud software player with a logical fit inside HP, it provides email archiving, security, governance and compliance products. With a current market cap of about $1.2 billion, it would, assuming a 20 percent premium, go for about nine times forward sales.

DocuSign: HP is an enthusiastic customer of this privately held cloud-based replacement for handwritten signatures on documents. Expected to complete an IPO this year, it is growing like crazy and has designs to do business in every major segment. Given HP’s long history in printing and managing paper documents, there’s a logical fit. Trouble is, its CFO insists it’s not for sale.

Marketo: This cloud-based marketing software company is the last publicly held company standing in the white-hot cloud marketing space after ExactTarget and Responsys were taken out by Salesforce and Oracle respectively. Its shares have soared — more than eight percent last Friday alone — on the expectation that it will be next. Marketo is getting honorable mention on this list only because at its valuation of $1.6 billion, HP could afford it. But why pay 13 times forward sales? Plus HP has no presence in the cloud applications space, making it a less logical fit. A more realistic buyer is SAP.

ServiceNow: Another honorable mention. It would seem that ServiceNow’s cloud-based help-desk products for large corporations would be a logical fit inside HP. Its healthy sales growth, and the fact that it’s expected to turn its first profit this year, also make ServiceNow attractive. If only it were less expensive: Currently trading at $7.7 billion, assuming a 20 percent premium, it would sell for $9.2 billion or about 15 times forward revenue, well out of HP’s range. For now.

You can play this game too: Have a look at the Cloud Computing Index put together by Bessemer Venture Partners and pick your own candidates from its list of publicly traded cloud software companies. Also a note on valuations: As of late December, which is when the index was last updated, the 38 companies on that list had an average enterprise value of 8.4 times forward revenue. That’s a slightly different metric than the market cap to forward sales ratio I used above, but it’s close.



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