Monday, March 9, 2015

HP Buys Aruba: What Does It Mean?

Here we go again: HP makes another significant acquisition.  The timing, before effecting the separation of HPQ into HP Enterprise and HP, Inc. seems a bit awkward, but there were probably market reasons.

From what I can gather, Cisco having the dominant share in wireless networking (over 50% according to some industry research) couldn't have made a move on Aruba (around 13% according to industry trades) without some concerns about its prior Meraki Networks acquisition and without risks of being perceived by the Feds as anti-competitive.

Dell is probably preoccupied with its recent privatization and with internal redeployment of executives and resources to have done the deal now, but later...that could explain why HP moved now.  Many non-Cisco players have private-labeled or bundled Aruba's technology into their offerings already, including HP.  So now HP leaves Dell, Juniper Networks and Brocade out in the cold to forage over a smaller universe of targets to exploit new wireless standards with enhanced security.

According to Credit Suisse, the $2.7 billion price is 2.6x revenues, and CS projects that the acquisition will contribute about $0.07 per share to HP's FY 2015/16 earnings. According to Argus Research, HP's networking revenues in their prior fiscal year were $2.25 billion, and the annualized run rate of FY15 revenues for Aruba (based on their fiscal second quarter) is $852 million.  So, without any sales force synergies and without significant losses from Dell and other customers, Aruba's revenue contribution should be 25-35% of HP's 2015/16 networking revenues.

One thing this acquisition does point out: the acquisitions of Colubris Networks (2008) and 3Com (2010) weren't the best-timed, and the combination, along with deficient R+D spending dating back to CEO Mark Hurd's time, has failed to add value to make HP's offering credible in the future, without Aruba.

If HP Enterprise is indeed a "nimbler" company going forward and a more astute company, then the sales force, product development team and executives at Aruba will not only stay with HP Enterprise, but they will be enthused and energized by the possibilities for vastly increasing their distribution and market uptake.  If they get frustrated with a big bureaucracy of HP insiders who things the "HP Way," then this acquisition too could fall apart.

Creating an Enterprise-centric company via the split was probably a strong selling point to Aruba's management.  Let's hope that this acquisition is different.


19 comments:

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