HP Expands Data Center Management Tools With Mercury Deal

Hewlett-Packard is solidly positioned in computer hardware, but it isn't a major player in many software markets. HP last week showed it would be raising that profile, agreeing to shell out $4.5 billion for Mercury Interactive, a leading maker of software testing, application performance monitoring, and SOA governance software.

While CA and BMC Software already are strong in those segments, HP's sights are on IBM, which plays in both software testing and managing applications under the emerging service-oriented architecture model.

An acquisition by Mercury earlier in the year may have played a part in the deal. Until January, HP had been using a service registry for SOA produced by Systinet, an early supplier of a neutral services-integration platform. Then Systinet was acquired by Mercury, leaving HP relying on a registry owned by a competitor. That question is now moot.

"If you're doing SOA, you have to have a registry. It defines the information flows around the services," Hurwitz & Associates analyst Robin Bloor says. With the deal, HP gets a registry plus Mercury's broad product line for software testing and application management. Bloor says there's little overlap with HP's OpenView system and network management platform.

A New Story To Tell
Before the Mercury acquisition, HP didn't have much of a story for how it would extend OpenView into services governance and performance management. The combination of OpenView and Mercury's software will let HP offer a complete enterprise IT management package covering systems and applications planning, development, testing, deployment, and operations. Plus, the fast-growing Mercury--in January, it reported 2005 revenue grew about 22% from the previous year--has a blue-chip customer base that includes Bank of America, Morgan Stanley, and the U.S. Army.

Software has always come second to HP's computer and printer businesses. The acquisition of Mercury, which will become a part of HP's software business unit, will boost software revenue 10% to 15%, to more than $2 billion a year, and profit by 20%, CEO Mark Hurd predicted.

HP will be able to immediately use Mercury's application monitoring products in its services business, says Ann Livermore, HP's executive VP of technology solutions. She notes that monitoring application and network performance is part of its contracts with Procter & Gamble, one of HP's largest outsourcing customers. HP's tools let the company monitor it from the network side, but Mercury's app monitoring shows how a user experiences it.

Mercury's LoadRunner software tests the limits of traffic a software system can handle; Test Director lets an administrator order automated tests on newly developed software; and Business Availability Center delivers a user's view of application performance. Service-oriented architecture creates an opportunity for testing and governance tools like Mercury's because measuring the performance of many small software service components is more complex than doing so for a few large apps, says Christopher Lochhead, Mercury's chief marketing officer.

The $52-a-share cash offer, expected to close in the fourth quarter, represents a premium over Mercury's current stock price. It's also a second wind for Mercury, which has been mired in a stock option scandal that led to its delisting from Nasdaq in March. On Nov. 2, the company ousted three top executives--CEO Amnon Landan, CFO Douglas Smith, and general counsel Susan Skaer--for improper stock option pricing. The related expenses forced the company to restate earnings in July, wiping $525 million in previously reported profit from the books. It hasn't sorted out all the damage; it still needs to restate earnings as far back as the first quarter of 2005.

Hurd said HP reviewed Mercury's stock option reporting and concluded there were no hidden liabilities or earnings adjustments that aren't already known.

-- with Darrell Dunn