Technology firm hopes to generate $8-10 billion for Autonomy, Vertica, and Mercury Interactive
Hewlett Packard Enterprise Company (NYSE: HPE) is in talks with equity investment firm Thoma Bravo LLC to sell its software division for $8 billion to $10 billion, as reported by Reuters on Friday, September 2nd, 2016. The negotiations is part of HPE Chief Executive Meg Whitman’s plans to sell the software unit, which includes Autonomy, Vertica, and Mercury Interactive, as part of the Company’s restructuring efforts to focus largely on servers, networking, storage, business critical systems and technology services. The buyout talks comes after Hewlett Packard Enterprise’s recent Big Data Conference in Boston on August 29th, 2016, where the Company unveiled new features and extended cloud platform support for its Vertica big data analytics platform.
Following its separation from computer and printer maker HP Inc. (NYSE: HPQ) in November 2015, Hewlett Packard Enterprise is looking to align itself with an increasingly digital world driven by the cloud, data analytics, the internet of things (IoT), artificial intelligence (AI) and machine learning, virtualization and software-defined data centers. In May 2016, HPE agreed to merge its IT services and outsourcing unit with Computer Sciences Corp. (NYSE: CSC) to create a $9 billion company in a tax-free all-stock transaction known as a Reverse Morris Trust. The deal, which is expected to be completed by March 2017, will enable the company to operate in services, but reduce the business costs associated with it.
HPE acquired part of its software portfolio as a result of its $10.3 billion acquisition of Autonomy Corp. in 2011 and the $4.5 billion acquisition of Mercury Interactive in 2006. The software unit also includes Vertica, ArcSight, a cybersecurity firm, as well as products for IT operations management.
Thoma Bravo emerges highest bidder
HPE has received offers for its software unit from a number of private equity firms, including Vista Equity Partners Management, Carlyle Group, and TPG Capital, for as much as $7.5 billion in a sale process managed by investment bank Goldman Sachs Group Inc. (NYSE: GS). Thoma Bravo has made the highest offer of $8 billion to $10 billion for the assets. So far, no deal has been finalized, and Thoma Bravo may end up buying only some of the assets or none at all. It is also possible that HPE would turn to a buyout firm to pursue a deal, according to Reuters.
Nonetheless, so far Thoma Bravo is seen to be the ideal suitor for HPE’s software assets since it has invested in or bought a number of tech companies including Riverbed Technology, Blue Coat Systems, Compuware Corp., DigiCert, Dynatrace LLC, and LANDesk. This could result in synergies in terms of cost savings and efficiencies if combined with some of HPE’s software assets.
Shift to cloud offerings
HPE’s software unit’s net revenue fell to $3.6 billion in FY15 from $3.9 billion in FY14, due to customers’ preference for software-as-a-service (SaaS) subscriptions.
The software unit has been facing headwinds posed by a market shift toward cloud-based offerings. In Q2 FY16, the software unit reported a 13% fall in revenue, while licensing was down 12% and support sales dropped 16%.
HPE tightens belt
HPE is the latest technology company looking to offload a large portfolio of non-core software assets that face extinction to the rapid technology evolution. In June 2016, Dell Technologies Inc. agreed to sell its software division to buyout firm Francisco Partners and the private equity arm of activist hedge fund Elliott Management Corp. for more than $2 billion. Recently, Cisco Systems Inc. (NASDAQ: CSCO) slashed its workforce by 7%; HPE too is tightening its belt so it can mobilize resources to the fast-growing areas of the cloud such as software-defined networking (SDN) and converged and hyper-converged infrastructure.
HPE’s stock ended the day at $22.21, gaining 0.23%, at the close on Friday, September 2nd, 2016, having vacillated between an intraday high of $22.30 and a low of $21.94 during the session. The stock’s trading volume was at 6,481,086 for the day. The Company’s market cap was at $38.31 billion as of Friday’s close. The stock trades at a PE ratio of 17.54.
Converged Infrastructure Market Overview
Following the trend among large organizations that are shifting their workloads to the cloud, vendors of servers, cloud platforms, and business critical software technologies are looking to differentiate themselves through solutions that offer higher efficiency, lower operational complexity, and rapid scaling capability. This in turn has led to various degrees of convergence in the areas of computing, storage, and increasingly, networking resources, in recent years.
Keeping with this market trend, companies such as EMC Corp. (NYSE: EMC) offer fully integrated solutions, where it also provides all the components or includes components made by other technology vendors (depending on customer demand). Both these categories use discrete systems that are designed to work in combination.
HPE operates in the single-vendor segment of the converged infrastructure market, which is dominated by EMC and Oracle Corp. (NYSE: ORCL). Of the segment size of $1.58 billion in Q1 FY16, EMC accounted for 25.5%, Oracle for 24.0%, and HPE for 22.5%, according to IDC, and as reported by Reuters. EMC and HPE grew strong double-digits while Oracle declined.
Cisco Systems Inc. and NetApp Inc. (NASDAQ: NTAP) dominated the multi-vendor segment of the market with a 55.2% share (up low single-digits) in Q1 FY16, with EMC the only other major player with 35.6% share representing a high single digit decline. EMC is in the process of being acquired by Dell, leaving five major vendors – Dell, Oracle, HPE, Cisco, and NetApp in this segment.
In recent years, the converged infrastructure market is witnessing the emergence of a third category – hyper-converged solutions, which offers storage and computing as a single unit using the same server resources. The hyper-converged solutions segment is expected to grow at a rate of 79% to reach almost $2 billion in 2016. By 2019, this new category is forecasted to grow to $5 billion and account for 24% of the converged infrastructure market. In Q1 FY16, this category grew 148% to $371.88 million, according to IDC, and is dominated by smaller players like Nutanix and SimpliVity that pioneered the concept, as well as others like NimBoxx, Scale Computing and Pivot3. The only major player in this segment is VMware Inc. (NYSE: VMW), which is owned by EMC.
However, Cisco reported strong demand for its HyperFlex (500 new customers in the first full quarter since launch), with VMware reporting that its hyper-converged license bookings, including VSAN and VxRail grew over 200% from last year.
In this emerging segment, HPE has offerings including the Hyper Converged 380 and HPE Hyper Converged 250. With Dell entering the picture, and the strong presence of Cisco, HPE needs to raise its game, which it is doing by offloading its software assets and freeing up resources as it takes on intense competition.