HP Buys Mercury Interactive; Who's Next?

by: David Jackson

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

H-P to Buy Mercury for $4.5 Billion In CEO Hurd's First Big Purchase

  • Summary: Hewlett-Packard Co. announced that it is purchasing Mercury Interactive for $4.5 billion net of cash and debt, equal to $52 per share, a 33% premium to Mercury's closing stock price yesterday. HP CEO Mark Hurd had previously said that HP would focus on small acquisitions, but argued that this one was too good to miss. Mercury Interactive's products, he said, will complement HP's own diagnostic and management software products. Mercury Interactive's stock has been beaten down by dismissal of its CEO last year, misuse of stock options and $70 million of legal and accounting fees that resulted from that, and demotion from the Nasdaq to the pink sheets. Mercury Interactive has not yet refiled its 2005 annual SEC filing, and closure of the deal is contingent on its doing so as that will determine the number of shares outstanding and thus the exact value of the acquisition. HP said that the addition of Mercury Interactive will take its annual software sales to $2 billion, with 10-15% growth by fiscal 2008 and a roughly 20% operating margin.
  • Comment on related stocks/ETFs: This is a smart and timely move for HP (NYSE:HPQ), which scoops up a great company and set of products at a bargain, options-scandal-battered price. For that reason it's a horrible finale for Mercury Interactive's (MERQ) investors. But the key question for investors now is: Which other software companies may HP acquire? Two aspects made Mercury Interactive attractive to HP: its business technology optimization software fits well with HP's on-demand software strategy. And second, Mercury's stock has been severely beaten up. There will no doubt be speculation about other potential candidates that fit these criteria. Two possibilities: Keynote Systems (NASDAQ:KEYN), market cap $200 million, and WebSideStory (WSSI), market cap $237 million. Or perhaps HP will move more aggressively into OnDemand services, potentially acquiring RightNow Technologies (NASDAQ:RNOW), market cap $403 million, or SumTotal Systems (SUMT), market cap $134 million. Other suggestions welcome in the comments below. Resources: The full HP press release is here, and details of Mercury's products are available on its web site.