HP's Expanding Software Portfolio: Who Is Next?

Since Mark Hurd took over the reigns of HP (HPQ) on March 29, 2005, the company has been leaning into software, mostly through acquisition. Within the last 24 months, HP’s software group has made six acquisitions, totaling nearly $7 billion. It’s not acquisition at Oracle (ORCL) scale, but it’s a big shift for the company that until recently could count its OpenView enterprise management suite as its primary software strategy.

HP isn’t going after enterprise applications, such as ERP, supply chain and CRM, or even application servers as has been rumored. Tom Hogan, senior vice president for HP Software, told me that BEA Systems (BEAS), which has been spun as a target for HP or Oracle, isn’t of interest.

I need to avoid commenting on specific target, It’s a category that is not a short-term strategic priorty for us. We are trying to elevate the discussion with the CIO, Hogan said. They universally tell us four things. Increase efficiency and reduce cost, not with hardware which keeps getting cheaper, but in the labor it takes to run a business. Number two is speed. No company delivers services fast enough to satisfy the line of business executive. Third is the concept of risk and compliance and tools to mitigate risk. The last is automating more things to help free up resources to do new things.

It’s estimated that 65 percent of a CIO’s budget is allocated to keeping things running, and the demands are growing exponential as technology evolves. Things like application servers are necessary but insufficient. It’s important techie stuff you have to have. You need application servers, operating systems and databases. It’s not very differentiated. You can’t beat your competition by having a dial tone. It’s low-level infrastructure everybody has to have. We support all industry standards and we operate at a higher level.

Hogan is focused on constructing an integrated set of software assets for managing and automating infrastructure, most recently adding Mercury and Opsware to the mix. Peregrine was acquired at the end of 2005 for its asset management and enhanced IT service management capabilities.

Hogan, who joined HP 18 months ago, after a stint as CEO of Vignette (VIGN) from 2002-2006 and previously 17 years at IBM (IBM)and two at Siebel (SEBL), said that HP’s goal is to shift more of its $100 billion plus in annual revenue to the software side. In the last quarter, HP officially reported that software accounted for about 2 percent of sales, but Hogan offered another perspective based on how to calculate the software revenue contribution.

People lose sight of the $100 billion breakdown—30 percent for the PC business, 30 percent for imaging and printing and 40 percent for the enterprise business. The $2 billion in software on the P&L is just the software for which I have direct ownership. HP-UX is sold in the hardware group, and there are many other software assets like that, Hogan said. Software is actually north of $4 billion, which makes us the sixth largest software company in the world. If $38 billion is the estimated size of the enterprise business, software accounts for 12 to 13 percent. We plan to grow aggressively going forward and increase that percentage. For comparison, IBM generates about $90 billion in enterprise business revenue.

HP is investing in several areas to manage software infrastructure. The Mercury acquisition and OpenView provide a foundation for demand and portfolio management, quality assurance, performance validation, application lifecycle management and service management. HP’s new enterprise datawarehouse, Neoview, will be included in the financial roll up for enterprise software starting in the November [HP’s Q1 2008], Hogan said.

HP’s recent acquisition of Opsware for $1.6 billion brings potential cost savings to datacenters and IT operations by automating processes, such as provisioning, asset tracking and change and configuration management. With OpenView, Peregrine, Mercury and SPI Dynamics, which HP acquired in June for its Web application security assessment software and services, HP’s enterprise software stack is threaded through the application lifecycle.

If you build a new application, you want to make sure it has the performance and scalability, Hogan said. Secondly, you want to test for quality–does it perform the intended business function, such as checking inventory. The third piece is making sure it has been tested for security vulnerabilities. The fourth piece is service-oriented architecture. There are three issues–management, quality and governance. It’s different when you build an app and have great control over performance, quality and security aspects. With SOA you need to test in advance 10x more. HP has assembled a portfolio of software to handle SOA-based services.

Hogan claimed that HP is “three steps ahead” of competitors, led by IBM.

There are companies who have pieces of the puzzle.We believe we are the leading and arguably the only company who has assembled all the necessary pieces. We want to link different pieces of puzzle to provide a coordinated holistic view. This separates us from dozens of other competitors cobbling together parts.

Microsoft, which accounts for a large portion of HP’s global consulting services revenue, is also becoming more of competitor as HP fills out it software portfolio. Hogan said that HP’s software acquisition list is getting short. “We are likely to continue to expand the portfolio going forward, but in the short term we don’t have a want for intellectual property. Now we will help customers exploit what we have assembled,” Hogan said.

I asked Hogan if he missed some acquisitions or if HP moves too slowly. “Some large competitors are buying a company every Friday. We are slower not because of financial constraints but to make sure we are serving customers. That is why we are not as active in stringing together acquisitions. We have to evaluate each company on case-by-case basis. So far I don’t believe we have missed anything as a result of our strategy.”

I am sure that Hogan regrets letting some companies slip through his fingers, and that Hurd has his checkbook ready as the consolidation wave continues. How about a huge check for Symantec (SYMC)? Enterprise and consumer security and assorted storage and asset management assets. What do you think is next on HP’s acquisition list?