HP takes a bold step into enterprise software

OVUM VIEW

Summary

A key part of HP’s proposed turnaround is the recent announcement of its intent to acquire Autonomy. Ovum believes this is a strong indication of yet another strategic shift for HP – this time from commodity hardware to software and related services. Ovum believes Autonomy is a bold, yet considered second move following HP’s acquisition of Vertica in February 2011 to enter the lucrative but fiercely competitive enterprise software space. Autonomy could be the start of concerted effort by HP to finally crack enterprise software. However, HP still has its work cut out to be a formidable competitor to incumbents such as IBM, Oracle, and SAP.

HP is buying a player whose technology is becoming “must have”

There is no doubt that Autonomy will be an expensive acquisition at $10.3bn. Autonomy shareholders will be happy; HP is offering to pay a whopping 64% premium on Autonomy’s closing share price and 24-times-trailing EBITA. Put another way, the bid was approximately 15% of HP’s market cap (based on its closing price on 18 August) for a business that will add approximately 1% to the top line. That is a premium price according to many Wall Street financial pundits. However, despite the strength of Autonomy’s unstructured data management technology, its portfolio is arguably still founded on “luxury” (as opposed to “must-have”) data management technologies and competencies that are still beyond the reach of many companies. This is partly because Autonomy’s software is difficult to pigeonhole into a distinct information management software category. The company offers a number of constituent solutions (enterprise search, e-discovery, archiving, web content management, and more) that are underpinned by its proprietary, meaning-based computing layer, IDOL. Although these solutions warrant serious individual attention, Autonomy’s overall value proposition, marketed under the “Power, Protect, and Promote” moniker, has a much grander ambition – to provide a data-agnostic understanding of enterprise content in any structured or unstructured file format, be it numeric, text, voice, or even video. The IDOL platform aims to bring structured order and intelligence across all of these data sources with a clever set of algorithms and technologies that automatically extracts key concepts and ascribes meaning to information. The applications are endless in theory. However, how many companies are currently implementing this as a business solution? Most continue to struggle with managing (primarily structured and relational) data held in corporate databases and enterprise applications such as ERP and CRM.

Herein lies Autonomy’s dual challenge: to articulate this as a business solution and be realistic about customer readiness for adoption. That said, Autonomy’s vision deserves merit, and will continue to attract attention as a business necessity as more companies recognize the disruptive business insights and benefits locked away in an emerging tidal wave of unstructured data sources (such as social media). Here “softer” notions of sentiment, meaning, and relationships hidden within information can provide even deeper analytic insights than traditional hard-wired business intelligence tools.

That is Autonomy’s forte. The company’s vision and technology will therefore provide HP with a solid basis for managing all types of enterprise information, whether structured or unstructured. Further acquisitions by HP will surely reinforce this strategy on both ends of the structured and unstructured data spectra.

HP is starting to rationalize its software portfolio

Until now, HP has had a varied software portfolio with relatively few synergies. Its largest software unit, the Business Transformation and Optimization (BTO) group, covers what should be a clear DevOps play, as it focuses on IT operational management and application lifecycle management. However, until now there has been scant integration or cross-marketing between the two. HP has begun rationalizing its software offerings into definable buckets targeting IT strategy and planning, application lifecycle management, IT operations, security intelligence and risk management, and information management (which is where Autonomy and Vertica fit in).

Today, software accounts for only 2% of HP’s overall business. Admittedly, the pending acquisition of Autonomy and the likely divestment of the PC business (approximately one-third of HP’s overall business), will change this percentage significantly. Nonetheless, compared with IBM or Oracle, HP still has only a fraction of the pieces necessary to offer a sufficiently broad enterprise offering.

The good news is that under CEO Leo Apotheker (appointed in September 2010), HP’s software strategy has not been scattershot; information has become the initial focus for acquisition. Autonomy will be HP’s third attempt at penetrating this market. The first was an ill-fated foray into the high-end enterprise data warehousing space with NeoView. Built on Tandem’s NonStop SQL database, which was acquired by HP and later repurposed for high-end data, NeoView suffered from poor sales and marketing. HP announced at the start of 2011 that it was pulling support for its enterprise data warehousing adventure as part of a planned phase-out by 2014. Then came the acquisition of Vertica in February 2011 for its scalable and high-performance analytic database built on AdvancedSQL and columnar-based technology, which is geared up for Big Data analysis. Autonomy adds an interesting new dimension to HP’s fledgling data enterprise software stable, providing an immediate foothold in enterprise search, unstructured data management, and e-discovery.

HP is likely to integrate Autonomy with certain parts of its existing software portfolio. However, Autonomy itself is a roll-up of acquisitions. From this Autonomy evolved into a multifaceted software provider of enterprise search, e-discovery, cloud-based storage and email archiving, analytics, and web content management. HP might be forced into some rationalization as it picks through potential overlaps between Autonomy’s largely acquired archiving product line and HP’s own Integrated Archiving Platform. This is also possible in content management, where HP has TRIM and Autonomy has assets gained from its acquisition of Interwoven.

There is also potential for integration with Vertica, particularly as Autonomy continues to deepen its interest in structured data management and starts to tackle Big Data processing problems for customers. Autonomy grabbed a 5PB cloud of data when it picked up Iron Mountain’s e-discovery, archiving, and online backup services in May 2011 for $380m. The ability of Autonomy’s software to easily plug into the cloud also lines up nicely with HP’s own ambition to provide solutions that allow organizations to store, archive, access, and analyze data natively in the cloud. Adding Big Data to HP’s playbook could position the company more strongly against rivals such as Oracle, which have been aggressively rolling out their own business intelligence and analytics offerings in this space. Autonomy might have some way to go to live up to its reputation as “UK’s Oracle” and a top-drawer Big Data player, but Oracle CEO Larry Ellison (and especially ex-HP CEO Mark Hurd, who is now president of Oracle) should be taking stock.

However, early talk of Autonomy’s common federated information layer straddling the Vertica and Autonomy processing environments that handle both structured and unstructured data is still far off in terms of a commercially available product or platform.

HP could be taking a leaf out of IBM’s playbook, but can it stay the course?

Numerous industry observers have drawn parallels between this acquisition and IBM’s foray into enterprise software. IBM embarked on its own journey into software in 2001, with a $1bn acquisition followed by a string of major software acquisitions. Many believe HP’s latest acquisition to be a mirror of IBM’s strategy to remain a software and services company focusing on its cloud technologies and solutions and Smarter Planet (driven primarily by its growing data management, business intelligence, and analytics software assets). The sale of HP’s PC business seems along the same lines as IBM’s sale of ThinkPad to Lenovo. HP is also earmarking the cloud as a near-term growth opportunity. HP might feel some short-term impact from dumping some of its consumer-oriented hardware (revenue loss from its WebOS devices), but its traditional focus on the enterprise could provide focus for a concerted software strategy. This time HP seems serious about cracking the enterprise software market and has put its money where its mouth is.

Given HP’s history of strategic U-turns, the jury is still out on whether HP will propel Autonomy forward as a software force to be reckoned with on a global scale. CEO Leo Apotheker’s intent to broaden HP’s footprint in software is beyond question. What is in question is how soon HP can or will marshal up the necessary resources to satisfy that intent. In the short term at least, the company will be preoccupied with spinning off the PC business. However, it will also be scouting for more ISV acquisitions to complement the technologies it now has under its wing.

The software HP owns right now – Vertica and now Autonomy – provides an interesting double-punch that potentially enables HP (for the first time) to offer solutions for search analytics of both structured and unstructured information on a truly Big Data scale. However, before that happens HP has its work cut out – not least to devise a clear enterprise software strategy and product family from what is still a mishmash of products. The next six months will be critical in this respect.

The acquisition of Autonomy is only the start of a longer journey into enterprise software. It does not make sense to stop at unstructured data management. Apotheker will surely use this as a springboard for further acquisitions to broaden and strengthen HP’s enterprise software portfolio; integration software provider Tibco and enterprise data warehousing stalwart Teradata could be the next targets. The question is twofold: will HP’s coffers run deep enough to support Apotheker’s grand ambition to transform HP into a software powerhouse? Perhaps more significantly, will Apotheker be around long enough? During the past decade previous CEOs have taken HP down different paths, only for each to step down and have their successors spend tens of billions taking the company on opposing strategic paths.

APPENDIX

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