IT industry giant Hewlett-Packard (NYSE: HPQ) recently announced its acquisition of leading next generation mobile enterprise network access solution provider, Aruba Networks (NASDAQ: ARUN), in a deal worth $2.7 billion. The acquisition is geared towards expanding HP's presence in the mobile networking space as wireless solutions continue to take over the market for networking. HP has thus directly addressed market trends which have shown that there has been a shift away from legacy networking as the need for enterprise networking has continued to increase with consumers switching to mobile devices. The company's legacy networking solutions business has been struggling as the growth in mobile continues and its market share in the WLAN industry has shrunk over the course of 2014. The company's top line growth has struggled as a result of consumers switching away from legacy networking solutions, the acquisition of Aruba with its prowess in harnessing mobile technologies is thus a step in the right direction and may lead to synergies which will boost HP's struggling revenue growth. Investor confidence has taken a hit owing to poor sales in FY 2014 and there has been a net outflow of money from the company's stock since the earnings announcement of 24th February. Through the deal with Aruba Networks, HP aims to create an industry leader in enterprise mobility by integrating Aruba's prowess in mobile-centric wireless solutions with its own strength in switching. There could be a potential upside to share prices if the integration is smooth and generates desired results. HP will close the deal in the second half of its current fiscal year.
Potential upsides for HP
HP's networking revenue growth has been struggling over the course of the last few years as consumers continue to switch away from legacy networking. HP has recognized adverse market trends towards legacy networking solutions and is thus making efforts to readjust its portfolio to reflect a higher proportion for mobile-centric wireless networking solutions in order to drive long term growth and hence value. Market trends are major determinants of the value that investors derive from a business and thus, by enhancing the share of wireless networking solutions in its portfolio through the acquisition of Aruba, HP has placed itself ideally to take advantage of favorable market trends towards wireless networking solutions. The move will thus generate positive synergies for investors. Furthermore, the acquisition of Aruba and a greater presence in the rapidly growing wireless campus networking space will boost HP's revenues as well.
Taking into account a 4% contribution to revenue and an estimated 100% growth owing to positive synergies from the Aruba acquisition, I calculate incremental revenues of almost $2.6 billion in FY 2016 which could possibly grow to $3 billion in the next fiscal year and even greater in subsequent years. The acquisition of Aruba Networks is thus a step in the right direction by HP and will boost investor confidence as it places HP in an ideal position to capture a majority share of the $18 billion campus networking market.
Potential downsides for HP - are they enough to offset upsides?
HP's acquisition of Aruba has definitely strengthened long term growth prospects but it is true that the overall contribution of the company's enterprise networking division still remains small. The company's PC business has continued to struggle and has dragged own growth over the course of the previous years. HP has also suffered from adverse macroeconomic trends in international markets, China and Europe in particular. The company has suffered the impact of exchange rate headwinds which have driven prices up and led to more competitive pressure. However, despite the small contribution of HP's enterprise networking division, the growth prospects are incredible and there will be a positive portfolio shift towards an increased proportion of enterprise networking. The acquisition of Aruba Networks will also make HP's enterprise networking business its fastest growing segment. The company's growth prospects will thus be boosted as the global demand for wireless networking solutions is expected to continue to rise in the coming years amid the continued emergence of advanced mobile technologies.
HP's acquisition of Aruba Networks may definitely drive share prices up. The strategic acquisition places HP in a much stronger position in the global enterprise networking space and will also allow for greater cloud adoption thereby allowing HP to benefit from yet another high-growth market. The company's investors definitely need a win after consistently disappointing sales performances throughout fiscal year 2014. The synergies from HP's Aruba acquisition will make the company's enterprise networking business its highest growth generating segment. The move also places HP on the favorable side of prevalent market trends. Using the dividend discount model, I estimate a $40 target for HP's stock thereby indicating a potential 21% upside to current share price of $33. Investors should take advantage of the current period of falling prices and go long in HP as it represents an ideal entry point.
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