HP's Mercury buy only tip of wide-ranging software plans

For the past couple of years, HP has been snapping up software companies, but its plans to acquire application management specialist Mercury Interactive should give the systems vendor the boost it needs to convince customers and the industry that it is serious about software, analysts say.

The $4.5 billion deal also should bring HP and Mercury Interactive customers a more complete management story as they look to better control applications from development to deployment to operations in more dynamic, flexible data centers, analysts say.

"HP's strategy for becoming a powerhouse in network and systems management and their focus on the adaptive enterprise where you use technology to optimize business operations has got an excellent foundation," says Richard Ptak of Ptak, Noel & Associates. "The problem they've had in the last couple of years has been the [lack of] credibility they have as a software provider."

HP has spent the last few years snapping up smaller software management firms such as Peregrine Systems, Novadigm and Consera Software, but none have been large enough to significantly impact the company's software revenue, Ptak says.

"The Mercury acquisition really bumps up HP's software business to where a significant portion of their revenue will now come from software," he says.

In 2005, HP reported net revenue of $1 billion from its software business. The Mercury buy is expected to increase that to more than $2 billion annually, HP says.

"HP traditionally is known as a hardware powerhouse and ... there have been questions raised about how serious they were about being in the software business since software represented a very small portion of their annual revenue," Ptak says. "This acquisition changes that."

More than the dollars, the acquisition also brings HP management tools that it had previously lacked in its OpenView portfolio, specifically in the area of application development and testing. Mercury's expertise in this area helps lift HP into a better position to compete with IBM, which has long had the kind of end-to-end management capabilities that HP now can offer, analysts say.

"HP can be more competitive against IBM software, although they're still much smaller than the IBM software group. But they can be more competitive specifically for test and development and general management against Rational and Tivoli," says Stephen Elliot, a research manager at IDC.

Tools to bridge application development and operations will be key for management vendors going forward as enterprise customers roll out service oriented architectures where application changes happen more frequently and IT is charged with more tightly integrating software with business demands.

"It fits into the move to utility computing because one of the problems in any enterprise today is the shrinking time between application changes," Ptak says. "With more complex applications there needs to be a feedback system that goes from development out into operations and comes back so that development and operations can work as part of a team. This [acquisition] closes the loop."