Hewlett-Packard Co. is in the M&A hunt for new technologies. After yet another disappointing earnings report in which sales declined and profits increased mostly due to cost cuts, HP is looking to buy new technologies to fill gaps in its product portfolio and increase sales opportunities. The renewed HP M&A hunt should set off alarms in the channel.
Whitman admits HP doesn’t have a good track record for capitalizing on mergers and acquisitions. It spent more than $25 billion in acquiring EDS, Palm and Autonomy only to see these major assets wither. Smaller acquisitions are having mixed degrees of success, but many remain too small to make a difference on the general HP balance sheet.
HP isn’t foolish. It has $13.5 billion in the bank — plenty of cash to make a number of deals. Whitman isn’t looking for another mega-deal like the 2003 Compaq merger, a she isn’t looking to repeat the folly of the Autonomy acquisition. Instead, HP wants smaller, strategic deals, such as the 2010 $1.5 billion deal for cloud storage vendor 3Par.
“Acquisitions will become part of our future, to further some of our strategic initiatives and shore up some of the product holes. … We don’t need a $5 or $6 billion acquisition. I think there are acquisitions in the $100 million to $300 million range, maybe some up to $1 to $1.5 billion that we might be interested in,” said Whitman on this week’s earnings call.
This measured approach shouldn’t bring comfort to the channel or general market. Billion-dollar acquisitions snap up young-but-growing vendors delivering innovative, valuable technologies. Solution providers like these vendors not just because they have good products, but also because they get more attention bringing those products to market. Solution providers can build business plans, develop resources and form strategic direction around such companies.
When acquisitions take these companies out of the game, solution providers’ plans and operations are disrupted. All of a sudden, their free-flow of collaboration with a nimble vendor is transformed by the bureaucracy of the larger acquirer.
This is what happened when McAfee Inc. bought Secure Computing. After paying nearly a half-billion dollars for the firewall vendor, McAfee wanted to capitalize on its new assets by quickly merging Secure Computing’s channel into its own. The result was a major disruption in the Secure Computing channel. The transition didn’t go smoothly, and many partners didn’t want to work with McAfee.
This the reason why most vendors that acquire companies with strong channels often allow autonomous operations during an extended integration and assimilation effort. But even this isn’t enough of a buffer. Sometimes, just the association with the larger acquiring brand is enough to turn off customers and disrupt operations.
And this is what happened when Dell bought SonicWall. Dell was smart about not rushing the integration of SonicWall’s 15,000 partners into its PartnerDirect program. Nevertheless, large numbers of SonicWall partners expressed concern about what it would be like to work with Dell. Some defected to alternative suppliers.
Such concerns wouldn’t be as bad if HP were in better shape. Just a few years ago, HP’s brand was widely desired, and the company could use its market presence to quickly capitalize on new acquisitions. That’s not the case today; the weakened HP needs to convince partners and customers it’s worth working with. This will make any transition tricky.
Whitman’s intention to avoid big deals and make strategic acquisitions comes with a bit of irony. While HP may gain strategic assets for bolstering its capabilities, such acquisitions are unlikely to make a positive difference in the company’s health. With regards to companies the size of HP, a business unit need to generate at least $1 billion to be taken seriously — much less make a difference in the overall company’s health. A $100 million or $300 million acquisition would pick up very small companies that won’t even appear on the HP radar.
Again, HP isn’t oblivious to its M&A history. Whitman promised discipline in any acquisition made by the company.
“We will be incredibly measured and disciplined. We are very mindful of the event that we just came off with Autonomy, so don’t worry about that,” she said on the earnings call. “As we see these big tectonic plate shifts, there’s no question that acquisitions are going to have to be a part of how we turn this company around.”
HP’s spending sprees are unavoidable, as are the potential disruptions they could cause. Solution providers should brace themselves for the aftereffects of any deal coming down the pike.
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