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Analysts: Mercury Acquisition To Bolster HP Software

The challenge for HP's sales force will be to minimize the complexity so that "they don't have to travel with a bag of six PhDs to unravel what they are selling," one industry watcher says.

Hewlett-Packard's planned acquisition of Mercury Interactive for $4.5 billion will immediately give Hewlett-Packard a strong foothold in the growing areas of business optimization, application testing and performance management--spaces that IBM and CA now dominate.

On a conference call announcing the deal Tuesday, HP's president and CEO Mark Hurd said Mercury Interactive will bolster the company's software business, while complementing its existing OpenView business, as well as the asset management software HP acquired from Peregrine Systems last year.

HP's lackluster software business has only recently turned a profit despite industry-leading tools like OpenView. Hurd says he's made it a priority to grow that business, and that he sees opportunities to grow margins for software and associated services. HP's software business cracked $1 billion for fiscal year 2005. Adding Mercury effectively will double that business, Hurd says.

"HP is building a software business to be reckoned with," Hurd says, adding that there is little overlap and there should be little trouble bringing the businesses together. "We are going to look to go synergize these businesses, and we think they together provide a software powerhouse and that's what we are going to go execute," he says.

Indeed, industry and Wall Street analysts say the deal makes sense for HP. The key challenge will be removing the complexity from what the overall software portfolio represents, says Dennis Drogseth, an analyst at Enterprise Management Associates.

"I think the opportunity is there," Drogseth says. "The challenge for HP's direct sales force as well as its channel partners is to minimize the complexity so that they don't have to travel with a bag of six PhDs to unravel what they are selling."

Chris Foster, an analyst at Technology Business Research says Mercury should be good for channel partners, particularly those that sell a broad portfolio of HP products.

"Overall, it's good for HP's resellers; it gives them more to sell," Foster says. "But if you are using HP to get in and go sell CA or BMC, you are going to have a problem."

That should fall in line with HP's ongoing drive to get partners to attach more software and services to their solution sets, as well as with its Adaptive Enterprise mantra to offer tools that align IT with the business.

So what does Mercury bring to HP?

"The most obvious is leading-edge capabilities in Web-based application performance, production and preproduction," Drogseth says. "There are a whole slew of capabilities there."

Mercury also has a long history of software focused on business-technology optimization, or BTO, focusing on application performance as it impacts business.

"That will be a good fit for HP with its focus on business-service management," Drogseth adds. It's going to bring application-management strengths in the distributed environment through predeployment and deployment." That is a growing requirement given the rapid growth of software based on service-oriented architectures.

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