Potential Acquisition Targets for Hewlett-Packard

by: Ron Sommer

This week’s Barron’s Magazine has an interesting article concerning a new strategic direction for Hewlett-Packard (NYSE:HPQ). HP has been in a slump. Its business model is built around enterprise technology, personal computers, printers and very profitable printer ink and cartridges. This is not a formula for growth.

Leo Apotheker, the incoming CEO, comes out of the German software giant SAP AG (NYSE:SAP). HP’s non-executive Chairman, Ray Lane, is a former president of Oracle (NASDAQ:ORCL). Peter Goldmacher, an analyst at Cowen, makes a compelling case for HP to move more boldly into software. Goldmacher outlines two possible scenarios. He says that HP can follow what he calls a "me-too" approach and build out by acquisition a collection of business software outfits offering solutions to various industry sectors. In this approach, HP would go head-to-head with the likes of Oracle and IBM. HP has introduced a set of services that combine software support and professional services. The service offering will primarily support HP’s Business Technology Optimization line of software, which includes software for business service management and IT service management.

Goldmacher offers a second option. He makes a case for HP to pursue an acquisition among open source software providers or cloud-based service providers. Goldmacher suggests that potential targets include Symantec (NASDAQ:SYMC), Teradata (NYSE:TDC), Informatica (NASDAQ:INFA), BMC Software (NASDAQ:BMC), ComVault Systems (NASDAQ:CVLT), and Tibco Software (NASDAQ:TIBX). A bolder move, according to Goldmacher, would be for HP to pursue Red Hat (NYSE:RHT).

There are more than 200 publicly traded software companies. We set out to identify potential takeover candidates by screening our database (data provided by Reuters Research, Inc.). We eliminated shares traded as ADRs and companies with market capitalizations of less than $1,000 million. We then sought companies we thought to be undervalued on the basis of enterprise value to sales. We also eliminated from consideration several obvious mismatches.

The metric, enterprise values to sales, is similar to the Price Sales ratio. The difference is that in using EV/Sales, we are valuing the firm and not a company’s equity. EV/Sales is not a stand-alone number. It must be considered in relation to several other variables. A company can have a high EV/Sales ratio because it is perceived to be a high risk. Conversely, a low growth company often has a low EV/sales ratio. Therefore, we attempt to estimate a company’s appropriate EV/Sales ratio by contextualizing it with earnings growth, operating margins and the debt to capital ratio. Using this methodology we identified three potential targets.



Recent Price

Price Chg. 52W




Market Value


Predicted EV/Sales


CACI International Inc










Novell, Inc.










SAIC, Inc.









CACI International (NYSE:CACI), along with its wholly owned subsidiaries and joint ventures, is an international information systems, high technology services, and professional services corporation. It delivers professional services and information technology solutions to its clients, primarily the United States government. Other customers include state and local governments, commercial enterprises and agencies of foreign governments. The Company operates two units: domestic operations and international operations. CACI delivers professional services and information technology (IT) solutions to its clients. Its services are primarily targeted to the areas of defense, intelligence, homeland security and IT modernization. In February 2010, the Company announced that it has completed its transaction to acquire SystemWare, Inc. In November 2010, the Company acquired TechniGraphics, Inc. and Applied Systems Research Inc.

Novell, Inc. (NASDAQ:NOVL), develops, sells and installs software that is positioned in the operating systems and infrastructure software layers of the information technology industry. The company develops and delivers Linux operating system software for a range of computers from desktops to servers. In addition, it provides a portfolio of integrated IT management software for systems, identity and security management for both Linux and mixed-platform environments. The company operates in two business segments: Security, Management and Operating Platforms business unit segment (SMOP) and Collaboration Solutions (CS). Novell, Inc. delivers Linux and related solutions for the enterprise. The SUSE Linux Enterprise platform underpins all of its products. Within the company's CS business unit segment, it provides collaboration solutions that provide the infrastructure, services, and tools customers require to collaborate across a myriad of devices.

Novell is already an acquisition target. The acquirer is Attachmate Inc., a private company owned by three investment groups. The offer is for $6.10 per share. Novell shareholders have approved the sale and the deal is expected to close in the first half of 2011.

SAIC, Inc. (NYSE:SAIC), is a provider of scientific, engineering, systems integration and technical services and solutions to all branches of the United States military, agencies of the United States Department of Defense, the intelligence community, the United States Department of Homeland Security and other United States Government civil agencies, state and local government agencies, foreign governments and customers in select commercial markets. Its business is focused on solving issues of national and global importance in the areas of defense, intelligence, homeland security, logistics and product support, energy, environment and health. The company operates in three segments: Government, Commercial, and Corporate and Other. In February 2010, the Company acquired Forterra Systems Inc.'s On-Line Interactive Virtual Environment product line. In addition, in February 2010, the Company acquired CloudShield Technologies, Inc.

We subscribe to Goldmacher’s idea that HP should expand into the open source software arena. We think Novell makes a better match than Red Hat and could be had for a very favorable price. Given that Novell is off the table for now, HP will look elsewhere. However, Attachmate is likely to find a way to maximize its value and put itself, along with the integrated Novell, back on the market.

If HP is looking for a government contractor, we think SAIC is the better bet. The company is profitable, has better margins than CACI and a stronger balance sheet. It is not a fast grower but that can change. As SAIC expands to the private sector, earning growth will be greater.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.