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November 20, 2005

HP looks to software and services acquisitions for momentum

Hewlett Packard Co is looking to software and services acquisitions to continue sales growth momentum in spite of ongoing restructuring, according to its recently appointed managing director for Europe, Middle East and Africa, Francesco Serafini.

By CBR Staff Writer

The Palo Alto, California-based IT giant has made five relatively small-scale acquisitions since its chief executive, Mark Hurd, announced in July that it was to 14,500 jobs in a bid to reduce operational costs and improve profitability.

Serafini said it is to early for those cost cutting measures to have impacted its financial performance, especially as restructuring costs of $1.6bn pushed its net income for the year ended October 31 down to $2.4bn, compared to $3.5bn last year, despite annual revenue up 8.6% to $86.7bn.

We’ll see the full impact not this fiscal year but maybe in 2007, he said, adding that reducing the company’s costs would enable it to improve operating profit, price products and services more competitively, and invest in R&Ds, skills, and acquisitions.

We don’t try to make short-term results, Serafini added. You review the cost structure and based on that you can reinvest to grow. In terms of acquisitions, Serafini said there are two clear areas of focus. If you look at the HP portfolio there are two major areas we are looking at: software and services.

HP’s relatively small OpenView systems management software business has been the main beneficiary of the $1bn or so HP has spent on acquisitions since the lay-offs were announced. In September the company announced that it was buying storage resource management vendor AppIQ Inc for what was said by one source to be $270m.

On the same day it also announced that it was snapping up asset management vendor Peregrine Systems Inc for $425m, while less than a fortnight layer it acquired Linux blade server management software vendor RLX Technologies Inc for an undisclosed fee.

If you look forward you can see other potential acquisitions in these sorts of areas, said Serafini, noting that the last two years also saw a number of smaller OpenView-related acquisitions.

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These have including Talking Blocks Inc for web services management, Persist Technologies Inc for information lifecycle management, Novadigm Inc for configuration and change management, Consera Software Corp for service modeling, and TruLogica Inc for user-provisioning software, as well as identity management software from Baltimore Technologies Plc.

Those acquisitions helped HP’s software business make a profit of $27m on revenue of $311m in the fourth quarter, meeting a profitability target laid down by former chief executive, Carly Fiorina, in June 2004. We committed to be profitable in Q4 and we achieved that, said Serafini. We still have room to room to grow, but it is a very solid result.

Aside from the super-wide digital printing technology assets purchased from Scitex Corporation Ltd for $230m in August, HP’s other acquisition since its restructuring was announced indicates its other area of focus. In September HP picked up CGNZ Ltd, the former New Zealand arm of Capgemini Ernst & Young, for an undisclosed fee, consolidated its position services in New Zealand.

Serafini said the company was also looking to make services acquisitions to boost specific skills and competence areas as well business in emerging geographies. If you look at Europe you probably observe that the market is going to consolidate, he said.

The company’s services business has shown dipping profit margins of late and while the company has said it is more concerned with increasing the profitability of HP Services than maintaining high revenue growth, revenue was up just 6% in the fourth quarter.

There is a tendency for customers to slice the size of outsourcing deals. There are less large outsourcing deals, said Serafini of the services pipeline, pointing to General Motors’ forthcoming $12bn services overhaul, which consists of more than 40 individual contracts.

Serafini was still bullish about the company’s prospects in services, citing emerging opportunities in Eastern Europe, the Middle East and South Africa, where the company is seeing opportunities for growth both in terms of product sales, and consulting and integration services.

He also maintained that HP has the potential to take a lead over its rivals in targeting these emerging markets as it already gets 40% of its worldwide revenue from Europe and two thirds of its business from outside the US, giving it more of a local presence and a potentially faster response to new business opportunities.

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