MergerTech

Ash Sethi – Analyst, MergerTech Advisors

While other tech giants like Microsoft and Google are utilizing multi-billion dollar M&A strategies to rapidly enter market segments in which they have not had traditional focus, Hewlett-Packard, the world’s largest PC maker, announced Thursday that it plans to spin off its hardware business and WebOS, a mere 16 months after spending $1.8 billion to acquire Palm.  Many are scratching their heads wondering if HP just blundered its way out of a sector that has been its bread and butter for years.

HP CEO Leo Apothaker may have taken a cue from ex-IBM head Lou Gerstner who years ago saved his company from collapse by phasing out IBM’s well-known but low margin PC business to refocus the firm onto IT services.  HP’s announcement in concert with a $10 billion cash purchase of analytics software vendor Autonomy can be read as an acknowledgement that the tablet market has rapidly matured into a choice between iOS and Android devices, and that HP would be better off long term leveraging its R&D assets to develop its software and services business where the environment is far more competitive.  So while HP is taking a painful hit in the equity markets, it may prove to be a master stroke. 

Ironically, HP announced its exit from hardware the same day Google, a renowned provider of web services, paid $12.5 billion to acquire Motorola Mobility and foray into an area it has no experience in: mass manufacturing.  While HP might have made a difficult choice to serve a long term strategic growth plan, the Motorola purchase may be a sign of a developing trend in defensive driven M&A in the tech sector.

True, with access to Motorola’s engineering process, Google can potentially create a slicker Droid phone, which alone could mount a serious offensive against Apple.  Yet Google was more likely thinking of Motorola’s patents and pre-empting a Microsoft takeover when signing the check.  Google has no obvious desire to be in hardware, yet had Microsoft got to Motorola first that could have spelled real trouble for Android.  Thus Google moved quickly, and Motorola got them to pay a 60% per share premium.  Expensive without doubt, but strengthening its patent portfolio will offer competitive protection to Google as they, Microsoft, and Apple all trade legal threats in the US and Europe.

From time to time companies need to engage in defensive moves, either by abandoning low margin or shrinking business segments or acquiring strategic partners to stave off competitors.  It certainly makes for more interesting reading when it involves eleven figure M&A transactions.