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HP takes another shot at network management, buys Opsware

HP takes another shot at network management, buys Opsware

By  Linda Tucci, Executive Editor

24 Jul 2007 | SearchCIO.com

Hewlett-Packard Co. (HP) showed its determination to expand its network management software business, announcing yesterday that it will acquire Opsware Inc., a leader in software designed to automate the increasingly complex task of managing the data center. The $1.6 billion purchase buys HP a mature vendor -- a scarce commodity in a segment of the management software market that is consolidating rapidly -- and at the same time offers enormous potential for growth, said analysts who follow the field.

But the question is how many times do you have to buy a product to get it right?
Ronni Colville
analystGartner Inc.
"There are no other vendors in the $100 million-revenue and higher range. Everything else would not have been worth the revenue," said Ronni Colville, an analyst at Stamford, Conn.-based Gartner Inc. The remaining independent vendors in the data automation space were down to Opsware and Lexington, Mass.-based BladeLogic Inc., which is expected to go public any day, she said.

Sunnyvale, Calif.-based Opsware also gives HP another opportunity to move forward in a space where it hasn't been successful, Colville said, referring to HP's failure to capitalize on its 2004 purchase of Novadigm Inc. According to analysts, the configuration software management vendor needed the kind of care and nurturing that HP was unable to provide.

Opsware, founded by Netscape pioneer Marc Andreessen in 1999 as Loudcloud and under the management of CEO Ben Horowitz, is a more self-sufficient company than Novadigm, with broader offerings and strong brand appeal. "But the question is, how many times do you have to buy a product to get it right?" asked Colville, who said she was surprised by the size of the deal.

"I think they paid too much. Why would you pay 16 times the cost value?" she said, when the range of deals in this space tend to be more like four to six times the cost value. "I don't get that. It's betting a lot on the future buyer."

Eric Gebaide, managing director at Innovation Advisors Inc., a New York-based investment bank specializing in technology mergers and acquisitions, said HP paid the price the market put on the company, or the "going number."

"This is a hot space," Gebaide said, adding that it is "a little silly" to ask if a company as big as HP can afford it. "HP has got to have a piece of that data center. Novadigm did not provide that."

Thomas E. Hogan, senior vice president, software at HP, underscored the point in the company's statement: "The acquisition of Opsware is intended to help our customers resolve one of their critical pain points: controlling the increasing complexity and cost of managing the data center."

Opsware is the latest in a series of IT management software acquisitions by HP, including Mercury Interactive Corp. and Peregrine Systems Inc. With Opsware, HP gets a "relationship with the desktop," Gebaide said. Opsware software works at both the data center and the desktop, thus moving HP closer to the "Holy Grail of management software," said Gebaide, referring to a single tool that can chart and manage the lifecycle of the PC, from conception to grave, or recycling center. "This gives them another piece in the puzzle of the lifecyle of the PC -- and the data center is mission-critical."

The challenge for HP, in his view, will be to hang on to the Opsware workforce. "In any technology transaction, if you can't hold on to the people you shouldn't have done the deal," Gebaide said. "You're dealing with intellectual property, and IP is not static."

"They can't afford to lose any of the Opsware staff, on the sales and the services side," Colville agreed. Opsware's 500 or so employees are expected to move to HP, but that doesn't always pan out. Mercury and Peregrine employees left after HP's acquisitions of those two companies, she said.

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HP seems to have taken pains to signal its confidence in Opsware staff. CEO Horowitz, whom Colville called "a very smart guy," got a newly created position out of the deal as head of HP's Business Technology Optimization organization. The post was expected to go to former Peregrine executive Deborah Traub, vice president of products management software at HP, Colville said.

She also agreed with Gebaide that the market has enormous potential. The combined revenue of the largest players now in the field is some $500 million, by her estimations -- a drop in the bucket in comparison to the possibilities in the market. "The number of servers, and the number of virtual machines sitting on top of those servers, which also have to be configured, is the size of this market, and nobody has captured that," Colville said.

Whether the deal delivers a sufficient ROI for HP or not, customers should benefit. In a two-man race, the "boutique pricing" was not challenged. "The more the big vendors buy these companies, the more chances the products will become commoditized," Colville said.

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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