Deal Boosts HP Clout in Software

You might think of Hewlett-Packard’s deal for Opsware on Monday as Goliath hiring David to throw rocks at an even bigger Goliath.

The $1.6 billion purchase along with a $334 million deal for Neoware continues HP’s two-year push into software aimed at challenging IBM when it comes to helping corporations manage their computing centers.

The purchase of Sunnyvale-based Opsware — a venture co-founded by Marc Andreessen of Netscape fame — is important to HP for two reasons, experts say. First, Opsware earned a reputation as a technological leader at a time some believe the expansion of the Internet is going to accelerate even more.

And though Opsware is comparatively tiny with $102 million in revenue, HP will promote co-founder Ben Horowitz, 41, to run a big piece of its burgeoning software business with annual revenue of $2 billion.

"We’re on the verge of a gigantic infrastructure build-out to support the Internet," Horowitz said. "I’m excited about the opportunity."

As a hardware company known for its printers and computers, HP historically has had a small presence in the software industry.

But early in his tenure Chief Executive Mark Hurd predicted the fast-growing software line could become one of the company’s "crown jewels." Profit margins on software are typically better than on hardware, and software purchases usually trigger sales of computer servers, storage and services.

In the past 24 months, HP has spent $6.5 billion on five key acquisitions, including last year’s $4.5 billion purchase of Mercury Interactive, a developer of application-testing software. Other deals include Peregrine Systems, Bristol Technology and SPI Dynamics. Coupled with its own OpenView software, the company’s arsenal is growing.

39 percent premium

HP agreed to pay $14.25 per share cash for Opsware, which represented a 39 percent premium over Friday’s closing stock price. The company was founded in 1999 as Loudcloud and changed its focus and name 18 months after it went public in 2001. Andreessen in a blog entry Monday called the company’s re-creation "a complete restart as a public company."

"We’re buying the market leader in data center automation," said Ann Livermore, executive vice president of HP’s Technology Solutions Group. "We get some of the best people in the world in software who understand the technology and what businesses are grappling with."

Denny C. Fish Jr., an analyst with JMP Securities, said Opsware provides the "broadest solution" for companies trying to cut costs by automating how they manage servers, networks and data storage. For example, when hackers discover vulnerabilities in a company’s computer network, Opsware can save companies time when they need to install a software patch on computers running on various operating systems.

Opsware also is a leader in "virtualization," which enables companies to run more than one operating system — like Windows and Linux — on a machine.

"The challenge associated with it is that it’s still an early market, and you need to integrate the products with HP’s existing products," said Fish, whose company has no stake in Opsware. "HP does a little more than $2 billion in software revenue, while IBM does multiples of that. But HP is very well positioned in the system-management space, which is just a subset of what IBM does."

Tiny Opsware — which ranked 148th among Silicon Valley’s 150 biggest companies last year based on revenue and saw its first-quarter loss grow to $10.6 million — has about 350 customers, including Microsoft, Goldman Sachs, Comcast and the Defense Department. Its sales rose at a 28 percent pace, but No. 1-ranked HP has the clout to raise awareness of the products and sell them through its huge, established corporate marketing machine.

"HP has a first-class opportunity to define the architecture and be the major vendor of infrastructure — hardware and software — for the huge Internet build-out of the next 10 years," Andreessen wrote Monday in his blog at blog.pmarca.com.

Deal for Neoware

Separately, HP said Monday it will pay $16.25 per share for Neoware of King of Prussia, Pa. It makes thin-client computers, low-cost machines that require less upkeep, along with software for managing them. HP paid a 7 percent premium over Neoware’s closing price Friday.

Rachel Chalmers, a senior analyst at 451 Group, said the two acquisitions will help HP capitalize on the increasing corporate use of virtualization software, which allows a computer to run various applications independent of one another. "HP is positioning itself to take advantage of (this) trend," she said.

Opsware shares climbed $3.72 to $14.00 at 4 p.m. New York time in Nasdaq Stock Market trading. HP shares fell 11 cents to $48.43 in New York Stock Exchange composite trading.

Staff writer Dean Takahashi contributed to this story. Contact Mark Schwanhausser at mschwanhausser@ mercurynews.com or (408) 920-5543.