Tuesday, September 14, 2010

H-P to Buy ArcSight for $1.5 Billion

The Wall Street Journal

Hewlett-Packard Co. agreed to buy security-software maker ArcSight Inc. for about $1.5 billion, continuing the company's spending spree that began after Chief Executive Mark Hurd resigned last month.

The deal also represents the latest purchase of a smaller security firm by a huge technology company, a trend some see continuing as big tech considers the importance of adding security to their product portfolio. ArcSight makes software that monitors corporate networks for unusual activity, such as a hacker's attempt to break into a system.

ArcSight shares ended Monday trading up 25.1% at $43.91 on the Nasdaq, above H-P's offer price of $43.50 a share, suggesting some traders may be expecting or hoping for a higher bid, similar to what happened with storage maker 3PAR Inc. last month. ArcSight, of Cupertino, Calif., had been quietly shopping itself to a handful of big technology companies, and the agreed-upon deal provides a 24% premium to ArcSight's closing price Friday and a 70% premium to where it was trading a month ago.

On a conference call with investors, H-P executives declined to comment about the bidding process for ArcSight. They also wouldn't speculate about what would have happened if Mr. Hurd remained CEO.

H-P expects the acquisition to close by the end of the calendar year and doesn't see any material earnings dilution in its next fiscal year. The company is in the fourth quarter of its fiscal 2010 year. H-P shares, down 26% so far this year, added 2 cents to reach $38.22 in recent trading.

"The combination of H-P and ArcSight will provide clients with the ability to fortify their applications, proactively monitor events and respond to threats," said Bill Veghte, H-P's executive vice president of software and solutions.

The ArcSight deal continues H-P's push into software and other areas outside of its core computer-hardware businesses that began under Mr. Hurd. Software, networking, storage and services—all areas in which H-P has expanded recently—have higher margins than the company's core personal-computer and server-system businesses. H-P executives have said repeatedly that the company will continue the expansion strategy.

Mr. Veghte reiterated that sentiment Monday, saying H-P has "a very clear and good M&A strategy" that's unchanged since Mr. Hurd's departure.

"The company continues to make acquisitions where they make strategic operational and financial sense," Mr. Veghte said.

The deal for ArcSight is the latest episode in a month-long drama starring H-P. Last month, Mr. Hurd resigned following violations of the Palo Alto, Calif., company's code of business conduct, and he later joined H-P rival Oracle Corp. as co-president. Shortly following Mr. Hurd's departure, H-P launched a bidding war with Dell Inc. for 3PAR, eventually winning with a bid of $2.35 billion, almost double the amount Dell had initially agreed to pay.

Investors have been concerned about H-P's strategy—including the high premiums it's paying for acquisitions—since Mr. Hurd left the company.

"While such an acquisition would fit into the company's overall enterprise strategy, we believe Street sentiment would likely rather see the company get a new CEO announcement behind them and look to digest some of the acquisitions it has recently or will be completing (i.e., 3Com, Palm, 3PAR)," Stifel Nicolaus analyst Aaron C. Rakers said in a research note Monday.

Others noted the deal continues a wave of consolidation in the information technology sector. Last month, chip maker Intel Corp. offered to buy security specialist McAfee Inc. for $7.7 billion.

Security companies have attracted interest from larger information-technology providers lately as the industry's biggest companies look to offer a wider variety of products and give customers an end-to-end solution. Software that helps companies manage data securely is especially in demand.

H-P's Mr. Veghte said on a conference call that customers are not only looking for software products but also for services and hardware around the software to "deliver coherent solutions." He said H-P's acquisition of ArcSight will allow it to provide its enterprise clients with "holistic and proactive" solutions to manage their security risks and stay compliant with regulations at lower costs.

Meanwhile, Jefferies analyst Katherine Egbert noted seven other security companies that could attract interest from larger tech companies. They were: Sourcefire Inc., Fortinet Inc., Vasco Data Security International Inc., Symantec Corp., Check Point Software Technologies Ltd., Blue Coat Systems Inc. and Websense Inc.

The analyst added, though, "we do not believe any of these vendors are an active target right now."

Vasco and Check Point declined to comment, while representatives from Sourcefire, Fortinet, Blue Coat and Websense weren't immediately available to comment.