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7/25/2006
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HP To Acquire Mercury Interactive For $4.5 Billion

The deal would push HP's software business to over $2 billion a year. HP CEO Hurd says he is confident Mercury's stock option problems are fully disclosed.

Hewlett-Packard is the latest company to make the multibillion-dollar acquisition plunge, on Tuesday announcing plans to acquire IT management software and services company Mercury Interactive for $4.5 billion.

Mercury has been mired in a stock options scandal that led to its top execs being forced to resign, and the stock was delisted from Nasdaq in March for delays in filing financial reports. But Mercury has been a fast-growing software company with a blue-chip customer list. It makes products for software testing, application performance monitoring, and IT management software. HP CEO Mark Hurd said HP's OpenView system management software and Mercury's test and monitoring product line "complement each other almost completely, with no overlap."

Hurd said he understood HP could be viewed as paying a premium but said HP saw a unique opportunity to expand its software business. Software at HP has always come second to HP's computer hardware and printer businesses. The acquisition will boost software revenues 10% to 15% and profits by 20%, Hurd predicted.

The acquisition of Mercury will help further expand HP's portfolio of management software and services, and is expected to increase the size of HP's software business to more than $2 billion in annual revenue, according to HP.

"Today we are combining two market-leading businesses to create the most powerful management software portfolio in the industry," said Mark Hurd, HP chief executive and president in a statement. "Together, they will help customers cut their IT cost, speed the delivery of new services, and drive profitable growth at HP."

Mercury will become a part of HP's software business unit. The deal is expected to close in the fourth quarter.

Mercury's LoadRunner software tests the limits of traffic that a software system can handle; its Test Director allows a test administrator to order a battery of automated tests on newly developed software; and its Business Availability Center delivers an end-user view of application performance.

Ann Livermore, HP's executive VP of technology solutions, including services, said HP will be able to immediately use Mercury's application monitoring products in its services business. One of HP's largest outsourcing customers, Procter & Gamble, contracts with HP to manage P&G's applications' performance, she said.

The addition of Mercury's test and performance tools added to HP's own Openview offerings "gives us the critical mass" to boost software revenue and profits while posing a minimal challenge to its own R&D to get the two product lines to work together, she said.

The combination of HP and Mercury will create "the industry's premier provider of business technology optimization software," Tony Zingale, chief executive and president of Mercury, said in a statement.

The acquisition will combine the strength of HP's OpenView portfolio of software for systems, networks, and IT service management with Mercury's strength in application management and delivery, IT governance, and service-oriented architecture governance, the companies said.

The acquisition is the second multibillion-dollar technology acquisition announced this week. Advanced Micro Devices on Monday announced its intention to acquire graphics processor specialist ATI Technologies. That deal was valued at $5.4 billion and is expected to close in the fourth quarter.

HP has bid for Mercury at a time when Mercury's fortunes have taken a fall. On Nov. 2, the company ousted three top executives--CEO Amnon Landan, CFO Douglas Smith, and general counsel Susan Skaer--for inappropriate stock option pricing practices. The related expenses forced the company to restate earnings in July, wiping $525 million in previously reported profits from the books.

Hurd said HP had reviewed the state of reporting on the stock option misuse and concluded there were no hidden liabilities or earnings adjustments that weren't already known. Said Hurd: "We're comfortable with where we are in the stock options disclosures."

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