Documens Boss

HP today announced their intent to acquire Autonomy for $10.3B, their largest technology acquisition to date. This reflects premium valuations of 8.3 x Revenue; 16.5x of EBITDA, and 26.8x of P/E, all based upon 2012 consensus estimates for Autonomy results. As a public company, this reflects an approximate 60% premium over today’s share price and, in excess of a 50% premium, over average share price in 2011.
The timing of this acquisition comes immediately after some very surprising news for HP; it is spinning off it’s highest revenue producer, its PC division, and has also announced the closing of it’s WebOS mobile device group, which came to HP as a result of the earlier acquisition of Palm.

The Good news
In its announcement, HP spoke about its commitment to software and being a major software provider to industry. "Today is about transforming HP for the future," CEO Léo Apotheker said in the Palo Alto, California, during the company's third-quarter earnings call. "HP is at a critical point in its existence."
"Autonomy sees the information transformation and subsequent market opportunity exactly as we do," Apotheker said later in the call. "The two companies and cultures will blend well ... Bringing Autonomy into the HP world will be both seamless and complementary."

This acquisition clearly strengthens HP’s capabilities in both the enterprise content management space and the enterprise search space. It also adds important capabilities in the burgeoning eDiscovery area.  In addition, many of Autonomy’s efforts have been based on growing their SaaS offerings, which could prove an important asset for HP as they too, endeavour to become a larger player and provider in this area.

The questions
There are several, immediate key questions precipitated by this acquisition:
 

• Can HP and Autonomy really work together to make this acquisition successful? Recent history has not been kind to HP. Clearly, the acquisition of Palm and WebOS can only be judged a failure, as the unit has now been closed. The acquisition of Exstream Software is also dubious, as it has caused some real struggles inside HP; they have had a difficult time integrating the Exstream and HOP team and have lost some quality people in the process. Even years back, HP acquired Tower, and its offerings have been subsumed inside the larger organization.

Despite the leader’s comments, the cultures of the 2 companies are quite different. Nowhere is this difference more apparent than in the sales teams.  Autonomy’s sales culture is aggressive, sometimes arrogant, and with a lower concern for their customers.  HP’s is far more laid back and needs focused. It will be interesting to see how these come together.

• Was the offering price too high? Conventional wisdom, based upon standard multiples, may suggest the price was far too high. However, keep in mind that acquiring key SaaS delivery components are an important part of the deal. Even in today’s market, SaaS players are valued higher than conventional software companies.

• Does this deal make Mike Lynch the heir apparent to Leo Apotheker? As announced, Autonomy will remain the “independent” software arm of HP. However, is this really possible?  Won’t this have to become a tightly integrated component to maximize full value? If this can be leveraged, it puts Mike Lynch in a key position of importance for HP. At only 46, Lynch is in an ideal position to learn the business and eventually emerge as its new leader.

• Despite the acquisition, will HP be able to retain the Autonomy customer base? Over recent years, we have heard many comments about both the complexity of the Autonomy offering and questions about its overall reliability. With ECM and Search not core competencies of HP, it is difficult to see how this acquisition will improve customer satisfaction.

Implications of this Acquisition:

As Document Boss has predicted for some time, 2011 and 2012 will see continued industry consolidation and further acquisition activity in all sectors across small, medium and large businesses.  In addition, we will witness other key trends:
 

• The remaining, large independent ECM and BPM companies will be under increasing pressure and face more acquisition offers. We expect to see Open Text on the very active list here, with Appian and others in the BPO space also ideal targets.
• On the buy side, this should create far more pressure for the large enterprise players to make additional acquisitions. We see SAP, Oracle, Adobe and others now even more driven to acquire the key solutions components needed in the Search, ECM and BPO spaces.
• Valuations will continue to hold and increase in the sector. Larger companies will continue to pay enhanced multiples for companies they truly desire. This fact will be positive for all sector companies as they pursue exit strategies. The king will continue to be EBITDA!
• There are positive implications for the overall ECM and BPM sectors.  A high profile acquisition like HP/Autonomy affirms the importance of the space and the value these technologies bring to the end users.
• While consolidation persists, the sector will continue to expand! In every major deal, key people will leave.  In many cases, they will eventually start new companies aimed at solving highly specific business problems.  We see this trend continuing; perhaps a new “replace Autonomy” market will emerge.