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EMC, HP bid for Mercury Interactive

Jo Maitland, Senior Executive Editor
EMC Corp. and Hewlett Packard Co. (HP) are in a bidding war for application performance testing software company Mercury Interactive Corp., for as much as $3.5 billion, according to speculation among Wall Street and industry analysts. It's a deal many seem to think makes sense.

Mountain View, Calif.-based Mercury makes application performance testing software that lets users check the performance of applications, particularly databases, middleware and custom applications, against their infrastructure to find weak spots. More recently, the company has begun selling a change management tool that lets users see how an upgrade to their infrastructure might impact business.

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"With all the infrastructure consolidation going on with products like VMware, the next step [for users] is to check that what they have consolidated is optimized," said Brian Babineau, analyst with Enterprise Strategy Group. If you have consolidated 20 servers down to one server, for example, Mercury would help users to see if the new setup can still handle the old workload, Babineau said.

Other companies in this market include Symantec Corp. via Veritas' acquisition of Precise; Qwest Software and CA via its acquisition of Wily Technology Inc.

"It makes more sense for HP than EMC" to get into this space, according to Babineau. "It would be net-new business for EMC, and they'd probably have to keep it separate for a while." Integration could be a challenge for EMC, which is still caught up in integrating numerous other acquisitions. Meanwhile, HP already sells performance monitoring as part of its OpenView product. "They may look for Mercury to plug in or replace it," Babineau said.

Robert Stephenson, director of storage research at TheInfoPro, notes that Mercury's IT Governance, LoadRunner, WinRunner and its synthetic testing software products (Topaz) are a way into the production process of Fortune 1000 organizations. "The IT Governance portfolio product is very interesting; we do hear end users mention the product as part of their ILM [information lifecycle management] strategy for tying together storage value with application value," he said.

According to TheInfoPro's Wave 7 research, one of the top storage pain points is managing storage growth and proper capacity forecasting, and tying business values to IT.

"It is all about crossing the chasm between application views of the world and system views of the world," Stephenson said. "The more you can move in step with business needs, the more successful the technology strategy."

A Wall St analyst who prefered not to be named, said he'd heard the rumor that he says has been "doing the rounds for weeks." He says a deal would make sense for either company as hardware becomes a commodity, and software and services are where the profits lie. He notes that Mercury's new CEO Tony Zingale, appointed to turn around the company after the stock options scandal broke in November 2005, "has come in with new ideas" and could be looking to sell the company.

However, Mercury is in the middle of amending its 2004 annual report and first quarter 2005 earnings as the company continues to conduct a review on stock option matters. At issue is a practice known as "backdating," where a grant price on options is set at a lower, more profitable level. Mercury's then CEO Amnon Landon, chief financial officer Douglas Smith and chief counsel Susan Skaer were all found to have profited from the practice and were terminated.

The stock fell 27% as news of the scandal hit the Street, and it's still down 21% from its 52-week high of $45.43. Most analysts who track the company think it's a solid play from a fundamental standpoint, but with the stock option scandal barely behind it, they are wary. Mercury's market capitalization as SearchStorage.com went to press Thursday was $3.1 billion, a drop in the ocean for HP, but a stretch for EMC, which must be wary of diluting shareholder value by making further acquisitions, according to Babineau.


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