HP Shells Out $4.5 Billion to Buy Mercury Interactive

Published: July 27, 2006

by Timothy Prickett Morgan

This week was a hot one for big acquisitions, and Hewlett-Packard's relatively new president and CEO Mark Hurd made his mark on the week by convincing the HP board of directors to cough up $4.5 billion to acquire Mercury Interactive, a company that has created a set of tools and services for automating the software quality management, testing, and auditing. The acquisition will nearly double HP's software business to a $2 billion run rate.

Mercury was founded in 1989, and calls itself a business technology optimization (BTO) vendor, which doesn't sound a lot like software quality. Mercury has been a public company for a dozen years, and last year was embroiled in a stock options scandal that forced the ouster of its CEO, Amnon Landan, and two other executives. Mercury had to restate its financials from 1992 through 2004 because of the stock option woes, but despite all of this, HP was willing to pay a hefty 33 percent premium over Mercury's share price on Monday to acquire the company.

HP plans to roll the application management and IT governance software created by Mercury into its OpenView product suite, which is a broad collection of software for managing systems and networks. Mercury has close to 2,700 employees and booked $685.5 million in sales in 2004. The company is still working on getting its 2005 filings together for the Securities and Exchange Commission.

HP said that it expects the acquisition to close in the fourth quarter. And once it does, new HP Software chief Tom Hogan will have a lot more products to sell.

It is unclear if HP was in a competitive bidding process to win Mercury. A number of other vendors were rumored to be looking at snapping up Mercury while its stock was being hammered from the scandal. EMC (which denied it was interested), SAP (a Mercury partner), IBM, and CA were all mentioned as possible suitors for the company.

What no one seemed to be willing to say is that $4.5 billion is a lot of money to pay for any business that is generating around $1 billion in annual sales, no matter how fast it is growing. And the legal woes Mercury could have for some time are something that HP has bought into.