HP’s Pending Acquisition of Mercury – The Arms Race Continues

The rapid consolidation of the enterprise software industry continues with HP’s announcement that it has reached an agreement to acquire Mercury Interactive for $52 per share or $4.5 billion, a 33% premium to the closing price prior to the announcement. The valuation at 4.8x estimated ’06 revenues and 33x ’06 EPS estimates clearly reflects Mercury’s leadership position in its core testing business.

Implications

Underscores big is better and represents a very important addition to HP’s OpenView business, arguably moving them from being behind the curve technologically to being ahead. The move also underscores that CEO Mark Hurd is sufficiently confident in the overall improvement of HP’s core businesses as to finally address the long latent opportunity of the software business.

Ongoing significant consolidation in both systems and applications sectors underscores the grab for real estate by the bigger companies. HP’s move, coupled with recent public comments by Oracle suggesting increased interest in the systems management space is likely to further fuel speculation as to a variety of possible deal combinations. Oracle’s growing interest in systems management software as a means to both fend off Microsoft and to strengthen its competitive position versus SAP. Oracle’s recent success in dramatically expanding the breadth of its applications portfolio as well as increasing its presence in key vertical markets against SAP may further embolden Oracle in its acquisition spree.

Who’s Next?

No change in the usual group of suspects. Among the larger companies that are arguable candidates for acquisition by even bigger players, BMC Software, CA, Symantec and Quest are among those that come to mind. Other companies that could prove interesting candidates would be Compuware and Serena (which recently went private).

Who’s the Next Acquirer?

EMC’s pending deal to buy RSA, coupled with HP’s announcement, would suggest that IBM, Microsoft, Oracle and SAP prospectively could be in the market. Given the long standing practices of Microsoft and SAP to focus predominantly on internal development, we would guess that the next likely deal will be driven by either IBM or Oracle.

Is it a Good Deal for HP?

For what it's worth we think the answer is yes. While the price tag seems high, Mercury has been one of the few companies of size to show significant growth. In addition it clearly dominates the testing space and has a good vision for proactively integrating business and IT requirements.

Legal Disclaimer Nothing herein constitutes an offer or solicitation to buy any security. Readers are advised to review their own financial situation, risk tolerance, and investment objectives as to any investment. Information provided here is based, in part, from sources believed to be accurate and reliable, although no representations or guarantees can be provided as to its accuracy or completeness.Blue Atlas Management, LLC is our official business entity for consulting related work. In addition, we also have a website for those of you who are interested in learning more a little more about our services http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.

Postmortem Thoughts on SAP’s Disappointing Quarter – A Tipping Point?

During the past week we had the opportunity to listen to SAP’s earnings calls, attend Oracle’s analyst update, and speak with a number of independent applications consultants who work with larger companies to deploy and update applications.

We will spare readers a detailed summary of either Oracle’s Analyst Update or the SAP quarter given what has already been written in the general business press and by financial analysts. There are a myriad of very specific factors that have contributed to the recent earnings results of both Oracle and SAP that are independent of the underlying competitive attributes of both companies.

Our initial reaction to SAP’s comparatively weak license revenue figures was to not read too much into a single quarter’s performance. While we believe that view is correct, we have been somewhat surprised by the significant change in stance among the consultants we know toward Oracle. More specifically several months ago there was a good deal of concern and skepticism being expressed toward Oracle Fusion and the company’s commitment to continue to support indefinitely the wide variety of recently acquired applications. However, in our most recent conversations there has been a pretty dramatic reversal in this view. Today, while expectations as to when Fusion will arrive continue to, if anything, extend further into the future, there appears to be a good deal of confidence that Oracle will indeed continue to provide long term product support for the existing lines and that there will be no effort to force customers to adopt Fusion. As a result, the consultants are much more comfortable with their endorsements of Oracle and customers (as evidenced by Oracle’s very strong February and May quarter performances) appear to be moving forward again. It is unclear how much of the substantially improved license performance of Oracle’s applications business is a reflection of pent up demand and how long this pent up demand will favorably impact results. It is clear that the period of FUD (fear, uncertainty and doubt) that weighed on Oracle's performance as it executed an ambitious series of relatively large acquisitions (PeopleSoft/JDEdwards, Siebel, Retek, et. al.) is over.

Our point at the margin is that SAP’s disappointing Q2 performance and Oracle’s strong Q4 may in fact be early indication that the competitive balance is shifting to Oracle’s favor. It is clearly too soon to say for sure. We must admit that as long term bulls on Oracle the recent turn of events is exciting.

Legal Disclaimer Nothing herein constitutes an offer or solicitation to buy any security. Readers are advised to review their own financial situation, risk tolerance, and investment objectives as to any investment. Information provided here is based, in part, from sources believed to be accurate and reliable, although no representations or guarantees can be provided as to its accuracy or completeness.Blue Atlas Management, LLC is our official business entity for consulting related work. In addition, we also have a website for those of you who are interested in learning more a little more about our services http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.

Oracle Beats and SAP Misses, What Does it Mean? More Noise than Anything Else

SAP’s preliminary Q2 results indicate that the company fell short of their target growth range for product revenues of 15% to 17% year over year for the first half. Despite the miss in license revenues, management has reaffirmed their 2006 operating objectives based on strong order entry. As a reminder, SAP does not provide detailed quarterly guidance and the company’s business has a long history of substantial seasonality.

SAP’s disappointing Q2 license revenue performance raises a number of questions. Is the weaker growth a reflection of overall demand softening? Is it a reflection of a significant change in the competitive balance vs. rival Oracle? Or is it a short term reflection of a transitory seasonal shift in the competitive balance? Or is it a reflection of the differences in SAP’s areas of vertical industry strength vs. Oracle?

Since our retirement from the sell-side we have stopped maintaining detailed earnings models and likewise we no longer provide investment recommendations. Nonetheless we continue to spend time speaking with a wide range of industry contacts and tracking industry trends.

Our view is that we don’t believe investors should get too hot and bothered by the miss. While there are a myriad of specific factors that bear on the results, our discussions with various contacts (systems integrators, consultants, field managers, industry analysts, and users) lead us to believe the following.

First, that overall demand is steadily to gradually improving (despite the bigger issues being debated regarding the broader macro-economic outlook).

Second, while we have long been known as bullish on Oracle (and we took great pleasure in their strong May quarter performance) and believe that Oracle’s market share on an organic basis should grow we do not believe that this is at SAP’s expense. The ERP market is consolidating and SAP and Oracle are the beneficiaries with the losers generally being numerous smaller companies.

And third, although we don’t believe that SAP is being hurt in a major way by Oracle, we do believe that the seasonal aspect of Oracle’s fiscal May fourth quarter did have a short term impact.

We will do further checks on demand, but as of now we remain pretty confident that business prospects are good.

So what should investors do? Our bias is to view the sell off in SAP (and for that matter Oracle as well), combined with the continuing sharp decline in the broader market averages, as an opportunity. Next week Oracle is hosting a luncheon for analysts in New York City and we would be surprised if the company doesn’t argue that SAP’s miss is a function of Oracle’s gaining visible momentum. Likewise SAP with their detailed earnings announcement out next week will further affirm their target ranges for 2006. The battle continues.

Legal Disclaimer: Nothing herein constitutes an offer or solicitation to buy any security. Readers are advised to review their own financial situation, risk tolerance, and investment objectives as to any investment. Information provided here is based, in part, from sources believed to be accurate and reliable, although no representations or guarantees can be provided as to its accuracy or completeness.Blue Atlas Management, LLC is our official business entity for consulting related work. In addition, we also have a website for those of you who are interested in learning more a little more about our services http://www.blueatlasmanagement.com/. Please feel free to contact us at jmendelson@blueatlasmanagement.com, with any comments or questions.