HP acquires Mercury

Agressive play on the part of HP to renew its commitment to the software industry. Its management turmoils aside, Mercury Interactive always been one of the shining stars of the software industry. Mercury positively dominates the testing market and has gone on to great success in the IT governance market with the acquisition of Kintana.

I think this is a pretty smart decision on HP’s part.

Fairly reasonable price

Based on their Q3 2005 run rate, Mercury was somewhere around $800 million in annual sales meaning HP purchased them at around 5.5x revenues. This would seem rich for many software companies, especially a de-listed one, but recall that prior to the options scandal, Mercury was traded at a much more expensive multiple based on its profitability and growth rate.

Management premium

Mark Hurd has earned a reputation as a consistent executer. A steady hand at the rudder will likely add incremental value to Mercury as it puts its ESOP problems behind.

Leading assets

Mercury is #1 in every segment it competes in, often by a wide margin.

#1 in testing
#1 in IT governance
#1 in services repositories

Strong synergy

IT governance is a good fit with HP’s OpenView monitoring and management assets.

You can argue that managing a services repository (Systinet) is also a governance/monitoring exercise so this is a fit with OpenView too.

Better channels for the testing business. As I understand it, the testing business is very channel-dependent. That is, Mercury testing got a lot of sales by following on after IBM, SAP, Microsoft, Oracle and BEA sold their software and projects. HP has arguably stronger, more senior level relationships with all of these companies than Mercury does (based on its size and breadth of product portfolio). HP will probably be able to help up the level of the relationships Mercury currently enjoys with these companies.

Demonstrates commitment

No one’s going to ask again if HP’s serious about being in the software business.

Gutsy move by Mark Hurd. Congratulations.