Hewlett-Packard’s Board of Directors has yet to name a permanent CEO to replace Mark Hurd but is set to seal the deal on the company’s second major acquisition in less than one month.  According to a press release issued this morning, HP will acquire ArcSight for $43.50 in cash in a $1.5 billion deal.  The transaction is expected to close by year end.

The ArcSight transaction follows HP’s victory in a bidding war for 3Par earlier this month.  In a critical article in late August, we noted that HP’s Board appeared to believe there were “no constraints” in its bid for 3Par.  At the end of the battle, HP agreed to pay $2.4 billion for a company that posted sales of only $194 million in its latest fiscal year and has yet to exhibit any signs of consistent profitability.  By any measure, HP paid a very rich price for 3Par.

How does the ArcSight transaction measure up?  According to Value Line, ArcSight posted sales of $181.4 million in its latest fiscal year which ended on April 30.  The company is profitable with net income of $28.4 million in the latest fiscal year.  ArcSight provides high end security management solutions which have been in greater demand in recent months due to concerns regarding high profile hacking attacks.  According to the press release, HP intends to use ArcSight’s technology to further expand the range of offerings to corporate clients looking for turnkey solutions:

“HP’s acquisition of ArcSight will enable the creation of a new type of security solution, one that serves the modern enterprise,” said Tom Reilly, President & CEO, ArcSight. “By combining ArcSight’s Enterprise Threat and Risk Management Platform with HP’s breadth of application development and operations management solutions, HP will be able to offer an integrated security platform that delivers broader visibility, deeper context, and faster remediation of enterprise wide security and risk related events. In a world where perimeter security is no longer enough, businesses need this holistic approach to securing their networks, applications and sensitive data.”

We cannot comment on ArcSight’s business or valuation in any detail and it is possible that the company has breakthrough technologies that will allow HP to justify the purchase price.  However, by any conventional valuation measure, the price tag is extremely high.  We also know that ArcSight has been actively trying to sell the company over the past several weeks.  If prospects for growth are so explosive, it is fair to question why ArcSight’s management would be so eager to sell.

As we wrote over the weekend, technology companies seem to be allergic to the concept of returning cash to shareholders and prefer to hoard cash to retain flexibility to pursue deals.  Regardless of the merits of the 3Par and ArcSight deals, it is highly dubious for a company without a permanent CEO to engage in transactions at speculative valuations.  The incoming CEO will have no accountability for the performance of these acquisitions.  While in theory the Board of Directors can be held accountable, the reality is that any failures will simply be glossed over.

Disclosure:  No position.

HP’s Acquisition Binge Continues with $1.5 Billion Cash Offer for ArcSight
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4 thoughts on “HP’s Acquisition Binge Continues with $1.5 Billion Cash Offer for ArcSight

  • September 13, 2010 at 12:11 pm
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    I totally agree with you on this HP acquisition. I’m a Microsoft shareholder. I think MSFT is very undervalued right now, but every time I hear about an acquisition like this it makes me worry that Microsoft will do something similar with their cash. In Microsoft’s case, at least Ballmer’s/Gates’ interests would appear to be better aligned with the shareholders. But really – why does MSFT need $37B in cash/short term investments? The only reason I can think of is to leave themselves the option of making a major acquisition. I would *much* rather see them use that cash for share repurchases, given how irrationally low their stock price is right now.

    • September 13, 2010 at 12:47 pm
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      I agree that Microsoft does not need the cash it currently has on the balance sheet. There’s been some talk on Seeking Alpha and elsewhere of Microsoft potentially buying RIMM which is cheap in terms of valuation but has an uncertain future. I have more confidence that Microsoft will avoid stupid acquisitions due to Gates and Ballmer’s large holdings. Maybe they will see the light and declare a large dividend this year while shareholders can still benefit from the 15% rate. We’ll have to see.

  • September 13, 2010 at 1:23 pm
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    I haven’t searched the “rumor mill” on this, but I was worried that Microsoft might try to acquire Facebook. I believe they already own a piece of it (don’t remember what percentage). Is anybody talking about that possibility? That’s just the type of acquisition that’s worrying me…

  • September 13, 2010 at 1:25 pm
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    Agreed – that would be bad news. But I don’t think it is likely.

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