HP’s offer for the company represents an excellent outcome for Autonomy shareholders, particularly in the current phase of stock market volatility.
The view of one City analyst on Friday morning. And it’s hard to disagree.
In fact it’s more than excellent outcome. It’s like winning the Euro Millions Rollover.
But let’s pause to consider how Hewlett-Packard shareholders might be feeling this morning. Their company has given up on smartphones, put its PC business up for sale, and offered a ludicrous price for the UK’s largest software company.
Small wonder its shares were off 6 per cent overnight. With this deal and restructuring, CEO Leo Apotheker has, in the words of one sector specialist, admitted that HP has failed to cater to both consumers and corporations. And needs to exit most of its consumer businesses, just as IBM did six years ago.
Peel Hunt:
Whichever way you look at it, HP’s remarkably generous offer for Autonomy is a big win for founder and CEO Mike Lynch. Holders should quickly accept this truly golden offer. At 2,550p the recommended deal is almost an 80% premium to yesterday’s close. This is well over 30x for single digit earnings growth and approximately 3x what, more or less the same business would have cost three years ago.
The Directors of HP expect the deal to be accretive to earnings in the first full year following completion. If the cash you are using is costing you only 3%, then you could pay 33x and a deal would be accretive. HP is paying 34x but it would not have to take much cost out to get there. We would question whether an RoI of just 3% is in shareholders’ best interests. HP has grand plans of moving out of hardware and into the cloud. Having followed Autonomy since it floated in 1998, we doubt it is the answer to HP’s strategic problems, and we do not expect IBM and Microsoft to be quaking in their boots.
That won’t worry Autonomy shareholders, of course.
However they shouldn’t expect a counter bid to emerge. Autonomy has been a target for years and offer hasn’t materialised until now.
Indeed, Autonomy wasn’t trading through the terms of the offer at pixel time, something that doesn’t surprise Peel Hunt’s Morland.
Microsoft had a good look at Autonomy in 2008 before sensibly deciding to buy a much smaller competitor. HP is now paying 3x what Microsoft would have needed to pay three years ago for what is essentially the same IDOL software. Since almost every software company in the world has access to IDOL through OEM agreements, it is difficult to see how HP’s planned cloud solutions can be meaningfully differentiated. Unless perhaps, it plans to close Autonomy’s most successful and fastest growing business (the OEM business grew at 27% in H1 this year).
That said, the offer has been structured in a slightly unusual way. It’s a straightforward offer – as opposed to a scheme of arrangement – but with a 75 per cent acceptance level.
We haven’t seen that before and can’t figure out why. If you have any thoughts, please leave them below.
Related link:
Autonomy shares soar on $11bn HP deal – FT Alphaville