HP Buys System Management Tool Maker Opsware for $1.6 Billion

Published: July 26, 2007

by Timothy Prickett Morgan

Since it was founded during the IT downturn in 2002, systems management software maker Opsware has spent a lot of time and money creating the system and network management tools that it has always said cope with the deficiencies of tools made by IBM, Hewlett-Packard, Sun Microsystems, and others--and it has spent lots trying to convince the data centers of the world that its Opsware System was just the right thing to bring server, storage, and network sprawl under control. This week, HP admitted that Opsware was right after all, announcing that it would spend $1.6 billion to acquire Opsware.

Opsware was co-founded by Marc Andreessen, the upstart programmer behind Netscape Communications, the darling of the dot-com boom that benefited mightily from the commercialization of Internet technology. After selling Netscape to AOL in 1999, Andreesen went on to found Loudcloud, a managed services provider that had created its own scripting system to manage its servers and applications efficiently as a strategic edge over its competition. In 2002, Andreesen and his partner, co-founder Ben Horowitz, sold that hosting business to Electronic Data Systems for $63.5 million and inked a deal with EDS for $52 million that would see the service provider use the scripting tools, which were named Opsware, to manage its own vast data centers as well as the customers it got through the Loudcloud acquisition. Since that time, Opsware has built up its tools for managing the provisioning of servers, storage, operating systems, and applications, as well as a companion set of network management tools that are sold as part of the Opsware System; the network management tools are resold by networking giant Cisco Systems, too, and this was expected to be a significant revenue and profit maker in fiscal 2008.

Back in March, Opsware closed out its fiscal 2007 with $101.7 million and a net loss of $16.1 million. As the company's fiscal year came to an end, the company said that fourth quarter sales were $29.6 million and it had a net loss of only $1.7 million. Given expected growth rates, Opsware was set to go profitable in fiscal 2008, and that means it was ripe for takeover now. Waiting any longer would mean paying more, since Opsware is a publicly traded company and its stock would surely rise as it brought in profits. The company's shares, which are traded on the Nasdaq, fell in early calendar 2007 to kiss $6 a share and started rebounding in mid-March. Last Friday, Opsware's shares were trading at $10.28 a pop, giving it a market capitalization of nearly $1.1 billion. HP has offered $14.25 a share to acquire Opsware, a 39 percent premium over the Friday close. After taking into account Opsware's cash on hand and debts, HP is shelling out $1.6 billion for the company. The Opsware deal is the third-largest acquisition that HP has ever done, second to the $25 billion takeover of Compaq in September 2001 and the $4.5 billion acquisition of Mercury Interactive in July 2006.

Why would HP pay so much money for Opsware? In a word: sprawl. More than any other server and storage maker, HP--by which I mean HP plus Compaq--has been the big beneficiary of the move from central RISC/Unix and proprietary systems to distributed X64 systems running Windows and Linux. But managing that spawl of relatively inexpensive servers comes with a human cost, and it is one that IT managers are increasingly unwilling to pay. By moving to provisioning and management tools like the Opsware System, IT shops can manage more iron with the same people or even in some cases get rid of some administrators, who can manage hundreds of devices each instead of dozens.

Tom Hogan, the newly appointed senior vice president in charge of the HP Software group, is obviously thrilled that HP has shelled out over $6.5 billion in the past year to buy up software assets to build out HP's software business. "Opsware is the clear market leader in management software in the data center," Hogan explained in a conference call detailing the acquisition. "We listen to out customers and we want to address key pain points, and what we heard loud and clear from them is that the area of automation is strategic."

Hogan said that nearly all of the 550 employees working for Opsware would join HP, and said further that not only was Horowitz retained as an HP employee, but that he would be put in charge of the Business Technology Optimization group within HP Software, a group that comprises the venerable OpenView systems management tools created by HP itself, the software assets that HP got through its acquisitions of Mercury Interactive and Peregrine Systems, and now the Opsware products.

Hogan said that HP had been looking to add management software for run book automation, which is a special set of tools used by network operators. In the world of network operations, a run book is a manual that tells network operators what to do if they see a particular kind of alert and how to escalate the problem up to tech support, where there are more experienced experts, to solve a problem they can't solve. Back in March, Opsware bought one of the players in this subset of the market called iConclude for $30 million in cash and 3.3 million shares, taking one of the players off the table for HP.

It was unclear if Opsware was looking for a buyer, but it is clear that the big systems vendors and a few of the remaining independent system management tool vendors that have not yet been snapped up might have been be interested in acquiring Opsware. But even earlier this year, the company's stock price was so high that it was out of reach for most potential suitors. Horowitz says that the important thing is that Opsware snaps right into HP's software business.

"We really felt that HP had the best products in the categories that we are not in," explained Horowitz on the call. "This was just too good of an opportunity for us to pass up. We have just made HP the obvious choice for running IT."

The real question is why EMC, which snapped up server virtualization software maker VMware in December 2003 for $635 million, didn't buy Opsware already? VMware and Opsware are really bookends for solving the problem of data center efficiency and management. Ditto for IBM, which wants to build up its cross-platform software business, and Sun, which has similar aspirations. And now, people will start asking if IBM, EMC, or some other suitor will trying to swoop in and steal Opsware away. Maybe even Oracle will shell out the cash, just to be a spoiler and to further extend its portfolio. If HP loses the Opsware deal to another suitor, Opsware has to shell out $50 million to HP, according to documents filed with the Securities and Exchange Commission. Hogan did not want to comment on any speculation that IBM or another company might dive in and try to wrest Opsware away from HP.

HP expects the Opsware deal will close before the end of its fourth quarter, which comes to a close on October 31.

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