Oracle Buying Hewlett-Packard? Fuhgeddaboudit!
Amid all the recent drama that has unfolded at Hewlett-Packard — and the he-said she-said back and forth concerning Oracle and whether or not it was approached to buy Autonomy before HP ponied up — lies a lingering meme that refuses to die: That somehow the software giant Oracle is going to make a bid for HP.
Given the recent feuds between the management teams at the two companies, Oracle’s acquisitive history and HP’s sudden weakness, it doesn’t take much for a popular narrative of Oracle buying HP to emerge. It would be a dramatic denouement to the events of the last year that have found HP and Oracle at increasingly caustic loggerheads. Oracle CEO Larry Ellison would take some kind of victory lap and mount HP on the wall like a of trophy.
The idea gained some currency with an Aug. 21 story in the New York Post (which, like this Web site, is owned by News Corp.) arguing that HP’s $11.7 billion bid for the British software firm Autonomy, having caused shareholders to knock $12 billion and change off HP’s market cap, would therefore make HP more attractive to Oracle.
The meme gained further currency with a Bloomberg News story saying that HP’s board was “concerned” that its weakened condition had left it vulnerable to Oracle.
Let me put it like this: No. Just, no.
The first problem with the notion is this: What parts of HP would Oracle want to own? Answer: Practically none.
First, let’s look at the condition of Oracle: Its mainline software businesses are showing healthy returns, while its hardware business, built on the foundation of Sun Microsystems, the IT hardware concern it acquired last year for $7 billion, is ramping up to full speed. But here’s a fundamental truth: Software carries a higher profit margin than hardware, so when software companies buy hardware companies, they can’t avoid seeing their overall profitability erode.
Consider Oracle’s operating margin during its fiscal fourth quarter — its seasonally strongest quarter — during the last three years. In 2009, before the Sun deal was closed, it was 43.4 percent. In 2010, after the Sun deal was closed, it was 38.3 percent. In 2011 it was 41.6 percent. And during Oracle’s most recent conference call, CFO Safra Catz said Oracle hopes to get back to “pre-Sun” operating margins soon.
Now let’s look at HP and its operating margins: In its most recent quarter ended July, HP’s enterprise, storage and networking business turned in operating margins of 13 percent, which were down from 14 percent in the prior year’s period. The story was the same in practically every other HP business unit: Operating margins in services fell from 15.7 percent to 13 percent; in software they fell from 28 percent to 19.7 percent; imaging and printing margins fell to 14.6 percent from 16.9 percent. The only place they increased was the personal systems group — the PC unit that’s being considered for a spinoff — where they grew year on year from 4.7 percent to 5.9 percent.
Conclusion: Owning HP would do nothing good for Oracle’s profitability, especially at a moment when the stated goal is to nudge them up.
There’s more. As Mark L. Moerdler, an analyst at Bernstein Research, argued in a research note to clients on Sept. 26, software accounts for about 2 percent of revenue at HP. And what software it has is not the type that Oracle typically likes. When Oracle does acquisitions, it grabs companies that make applications that plug holes in its own product portfolio. The majority of HP’s software offerings — Autonomy nothwithstanding — deal with infrastructure management, not exactly a priority for Oracle. It is, however, a business where IBM and Computer Associates participate.
And there are two historically important business units at HP that would be outliers at Oracle: PCs and printers. Oracle has no interest in either one, and it’s hard to see that changing. Combined they make up more than half of HP’s annual revenue. In the hands of Oracle, they would probably end up being spun out, either together or separately, but why buy a whole company only to chop off more than half of it — a half that’s shrinking at that — at what would have to be unfavorable terms.
Let’s not forget the valuation estimate of HP’s $40 billion PC business: Analysts have expected that a hypothetical buyer might pay as little as $8 billion for it, or about one-fifth trailing revenue. Why go to all that trouble?
Further: Why would Oracle buy a company that’s roughly one-quarter exposed to the consumer market. Sure, HP has a retail distribution network that’s the envy of the PC industry. But Oracle would rather sell those retailers systems to help them manage their businesses, not the PCs they in turn resell at razor-thin margins.
If that’s not enough, then there’s one key bit about HP that Oracle would actively dislike. HP, by virtue of being the biggest distributor of Windows-based PCs and servers, is the world’s largest reseller of Microsoft Windows. If there’s anything more utterly antithetical to Oracle’s core values than helping put money in Microsoft’s pocket, I haven’t heard of it.
Finally, there’s the issue of cash. Even in its weakened state, HP is trading at a market cap of $45 billion and change. Assuming a premium for the whole thing, that pushes a hypothetical price tag to $60 billion. That’s too rich, even for Oracle, whose balance sheet as of Aug. 31 contained a combined $31.6 billion in cash and marketable securities. It would have to take on a tremendous amount of debt — amounting to 82 percent of fiscal 2011 sales — to get such a deal started, let alone closed.
HP’s directors and shareholders can rest easy. They have many worries about the Silicon Valley icon and the troubles in which it finds itself. But being acquired by Oracle isn’t one of them.